UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

 
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2011
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 1-10269


Allergan, Inc.
(Exact Name of Registrant as Specified in its Charter)

 
 
Delaware
95-1622442
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer Identification No.)
   
2525 Dupont Drive
Irvine, California
(Address of Principal Executive Offices)
92612
(Zip Code)
 
(714) 246-4500
(Registrant’s Telephone Number, Including Area Code)

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x  No   ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x  No   ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
x
 
Accelerated filer
¨
         
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨ No x
 
As of October 31 , 2011, there were 307 ,511,888 shares of common stock outstanding (including  2,479,847 shares held in treasury).
 


 
 

 
ALLERGA N, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2011
INDEX
 
 
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2

PART I — FINANCIAL INFORMATION
 
Item  1.   Financial Statements
 
ALLE RGAN, INC.
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
 
   
Three months ended
   
Nine months ended
 
   
September 30,
2011
   
September 30,
2010
   
September 30,
2011
   
September 30,
2010
 
Revenues:
                       
Product net sales
  $ 1,311.1     $ 1,192.0     $ 3,964.3     $ 3,529.5  
Other revenues
    17.3       16.2       52.5       80.6  
Total revenues
    1,328.4       1,208.2       4,016.8       3,610.1  
                                 
Operating costs and expenses:
                               
Cost of sales (excludes amortization of acquired intangible assets)
    188.1       177.7       566.7       539.2  
Selling, general and administrative
    538.5       517.3       1,694.7       1,490.1  
Research and development
    221.3       194.0       676.4       604.3  
Amortization of acquired intangible assets
    31.9       31.1       95.6       105.5  
Legal settlement
          609.9             609.9  
Impairment of intangible assets and related costs
    4.3       369.1       23.7       369.1  
Restructuring charges (reversal)
    (0.1 )     0.1       4.6       0.8  
Operating income (loss)
    344.4       (691.0 )     955.1       (108.8 )
                                 
Non-operating income (expense):
                               
Interest income
    1.8       1.6       5.6       4.1  
Interest expense
    (15.2 )     (20.4 )     (55.1 )     (50.9 )
Other, net
         25.8       (17.9 )     10.4       (6.6 )
               12.4       (36.7 )     (39.1 )     (53.4 )
                                 
Earnings (loss) before income taxes
    356.8       (727.7 )     916.0       (162.2 )
Provision (benefit) for income taxes
    105.8       (59.0 )     257.6       96.0  
                                 
Net earnings (loss)
    251.0       (668.7 )     658.4       (258.2 )
Net earnings attributable to noncontrolling interest
    1.2       1.8       3.7       4.3  
Net earnings (loss) attributable to Allergan, Inc.
  $ 249.8     $ (670.5 )   $ 654.7     $ (262.5 )
                                 
Earnings (loss) per share attributable to Allergan, Inc. stockholders:
                               
Basic
  $ 0.82     $ (2.21 )   $ 2.15     $ (0.87 )
Diluted
  $ 0.81     $ (2.21 )   $ 2.11     $ (0.87 )
 
See accompanying notes to unaudited condensed consolidated financial statements.
ALL ERGAN, INC.
 
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
 
   
September 30, 
2011
   
December 31,
2010
 
ASSETS
 
Current assets:
           
Cash and equivalents
  $ 2,212.0     $ 1,991.2  
Short-term investments
    66.5       749.1  
Trade receivables, net
    710.9       647.3  
Inventories
    242.1       229.4  
Other current assets
    451.1       376.7  
Total current assets
    3,682.6       3,993.7  
Investments and other assets
    266.9       261.4  
Deferred tax assets
    151.4       217.8  
Property, plant and equipment, net
    791.1       800.6  
Goodwill
    2,093.2       2,038.6  
Intangibles, net
    1,198.8       996.0  
Total assets
  $ 8,184.0     $ 8,308.1  
LIABILITIES AND EQUITY
 
Current liabilities:
               
Notes payable
  $ 78.8     $ 28.1  
Convertible notes
          642.5  
Accounts payable
    190.1       222.5  
Accrued compensation
    186.9       182.4  
Other accrued expenses
    467.9       436.8  
Income taxes
          16.1  
Total current liabilities
    923.7       1,528.4  
Long-term debt
    1,516.2       1,534.2  
Other liabilities
    615.6       464.4  
Commitments and contingencies
               
Equity:
               
Allergan, Inc. stockholders’ equity:
               
Preferred stock, $.01 par value; authorized 5,000,000 shares; none issued
           
Common stock, $.01 par value; authorized 500,000,000 shares; issued 307,512,000 shares as of September 30, 2011 and December 31, 2010
    3.1       3.1  
Additional paid-in capital
    2,725.5       2,815.5  
Accumulated other comprehensive loss
    (179.0 )     (152.9 )
Retained earnings
    2,752.2       2,225.9  
      5,301.8       4,891.6  
Less treasury stock, at cost (2,459,000 shares as of September 30, 2011 and 1,987,000 shares as of December 31, 2010)
    (196.1 )     (133.9 )
Total stockholders’ equity
    5,105.7       4,757.7  
Noncontrolling interest
    22.8       23.4  
Total equity
    5,128.5       4,781.1  
Total liabilities and equity
  $ 8,184.0     $ 8,308.1  
 
See accompanying notes to unaudited condensed consolidated financial statements.
ALLE RGAN, INC.
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)

   
Nine months ended
 
   
September 30, 
2011
   
September 30, 
2010
 
Cash flows from operating activities:
           
Net earnings (loss)
  $ 658.4     $ (258.2 )
Non-cash items included in net earnings (loss):
               
Depreciation and amortization
    189.4       193.9  
Amortization of original issue discount and debt issuance costs
    9.2       21.0  
Amortization of net realized gain on interest rate swap
    (1.0 )     (1.0 )
Deferred income tax benefit
    (50.8 )     (150.6 )
(Gain) loss on disposal and impairment of assets
    (2.1 )     12.1  
Unrealized (gain) loss on derivative instruments
    (12.0 )     7.0  
Expense of share-based compensation plans
    64.3       53.4  
Legal settlement
          609.9  
Impairment of intangible assets and related costs
    20.4       369.1  
Expense from changes in fair value of contingent consideration
    2.3        
Restructuring charges
    4.6       0.8  
Gain on investments, net
    (1.4 )      
Changes in operating assets and liabilities:
               
Trade receivables
    (81.7 )     (11.4 )
Inventories
    (19.4 )     0.9  
Other current assets
    (26.4 )     3.1  
Other non-current assets
    (13.4 )     (10.5 )
Accounts payable
    (32.1 )     (23.4 )
Accrued expenses
    21.9       33.4  
Income taxes
    (37.9 )     (21.5 )
Other liabilities
    9.2       (7.1 )
Net cash provided by operating activities
    701.5       820.9  
                 
Cash flows from investing activities:
               
Purchases of short-term investments
    (391.2 )     (499.3 )
Acquisitions, net of cash acquired
    (98.9 )     (69.8 )
Additions to property, plant and equipment
    (75.4 )     (50.3 )
Additions to capitalized software
    (7.9 )     (10.2 )
Additions to intangible assets
    (0.3 )     (18.5 )
Contractual purchase price adjustment to prior acquisition
          (1.7 )
Proceeds from maturities of short-term investments
    1,073.9        
Proceeds from sale of equity investments
    1.4        
Proceeds from sale of property, plant and equipment
    1.1        
Net cash provided by (used in) investing activities
    502.7       (649.8 )
                 
Cash flows from financing activities:
               
Repayments of convertible borrowings
    (808.9 )      
Dividends to stockholders
    (45.8 )     (45.4 )
Payments to acquire treasury stock
    (374.0 )     (198.9 )
Payments of contingent consideration
    (3.0 )      
Net borrowings (repayments) of notes payable
    25.7       (3.0 )
Debt issuance costs
          (6.0 )
Proceeds from issuance of senior notes, net of discount
          648.0  
Sale of stock to employees
    205.7       90.6  
Excess tax benefits from share-based compensation
    20.8       4.7  
Net cash (used in) provided by financing activities
    (979.5 )     490.0  
                 
Effect of exchange rate changes on cash and equivalents
    (3.9 )     (4.9 )
Net increase in cash and equivalents
    220.8       656.2  
Cash and equivalents at beginning of period
    1,991.2       1,947.1  
Cash and equivalents at end of period
  $ 2,212.0     $ 2,603.3  
                 
Supplemental disclosure of cash flow information
               
Cash paid for:
               
Interest (net of amount capitalized)
  $ 46.7     $ 25.3  
Income taxes, net of refunds
  $ 307.6     $ 269.1  
 
See accompanying notes to unaudited condensed consolidated financial statements.
ALL ERGAN, INC.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1:  Basis of Presentation
 
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary (consisting only of normal recurring accruals) to present fairly the financial information contained therein. These statements do not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP) for annual periods and should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2010. The Company prepared the unaudited condensed consolidated financial statements following the requirements of the U.S. Securities and Exchange Commission for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. The results of operations for the three and nine month periods ended September 30, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011 or any other period(s).
 
Reclassifications
 
Certain reclassifications of prior year amounts have been made to conform with the current year presentation.
 
Recently Adopted Accounting Standards
 
In December 2010, the Financial Accounting Standards Board (FASB) issued an accounting standards update that provides guidance on the recognition and classification of the annual fee imposed by the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, on pharmaceutical companies that sell branded prescription drugs or biologics to specified government programs in the United States. Under this guidance, the annual fee should be estimated and recognized in full as a liability upon the first qualifying sale with a corresponding deferred cost that is amortized to operating expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year in which it is payable. The annual fee ranges from $2.5 billion to $4.1 billion for all affected entities in total, a portion of which will be allocated to the Company on the basis of the amount of its branded prescription drug sales for the preceding year as a percentage of the industry’s branded prescription drug sales for the same period. The annual fee is not deductible for federal income tax purposes. This guidance became effective for calendar years beginning after December 31, 2010. The Company adopted the provisions of the guidance in the first quarter of 2011 and currently estimates the annual fee for 2011 to be approximately $23.2 million.
 
 In December 2010, the FASB issued an accounting standards update that requires an entity to perform Step 2 of the goodwill impairment test for its reporting units with a zero or a negative carrying amount if there are qualitative factors indicating that it is more likely than not that a goodwill impairment exists. This guidance became effective for fiscal years beginning after December 15, 2010 and was applied as a change in accounting principle with any impairment recorded as a cumulative-effect adjustment to beginning retained earnings. The Company adopted the provisions of the guidance in the first quarter of 2011. The adoption did not have a material impact on the Company’s consolidated financial statements.
 
In December 2010, the FASB issued an accounting standards update that requires an entity to disclose pro forma revenue and earnings of the combined entity for both the year in which a business combination occurred and the prior year as if the business combination had occurred as of the beginning of the prior year only. This guidance became effective prospectively for business combinations occurring in fiscal years beginning after December 15, 2010. The Company adopted the provisions of the guidance in the first quarter of 2011. The adoption did not have a material impact on the Company’s consolidated financial statements.
 
In April 2010, the FASB issued an accounting standards update that provides guidance on the milestone method of revenue recognition for research and development arrangements. This guidance allows an entity to make an accounting policy election to recognize revenue that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. This guidance became effective for fiscal years beginning on or after June 15, 2010 and may be applied prospectively to milestones achieved after the adoption date or retrospectively for all periods presented, with earlier application permitted. The Company made an accounting policy election to apply the guidance prospectively beginning in the first quarter of 2011 to recognize revenue in its entirety in the period in which a substantive milestone is achieved. The adoption did not have a material impact on the Company’s consolidated financial statements. As of September 30, 2011, the Company has potential future milestone receipts of approximately $473.0 million for the achievement of development, regulatory and sales milestones in connection with certain collaboration agreements, including $373.0 million related to a development and commercialization agreement that the Company entered into in 2010 with Bristol-Myers Squibb Company that granted Bristol-Myers Squibb Company exclusive worldwide rights to develop,
 
6

ALLERGAN, INC.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
manufacture and commercialize an investigational drug for neuropathic pain. Due to the challenges associated with developing and obtaining approval for pharmaceutical products, there is substantial uncertainty whether any of the future milestones will be achieved. The Company evaluates whether milestone payments are substantive based on the facts and circumstances associated with each milestone payment.
 
In October 2009, the FASB issued an accounting standards update that requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices, eliminates the use of the residual method of allocation, and requires the relative-selling-price method in all circumstances in which an entity recognizes revenue of an arrangement with multiple deliverables. This guidance became effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. The Company adopted the provisions of the guidance in the first quarter of 2011. The adoption did not have a material impact on the Company’s consolidated financial statements.
 
New Accounting Standards Not Yet Adopted
 
In September 2011, the FASB issued an accounting standards update that gives an entity the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This guidance will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, which will be the Company’s fiscal year 2012, with early adoption permitted. The Company does not expect the adoption of the guidance will have a material impact on the Company’s consolidated financial statements.
 
In June 2011, the FASB issued an accounting standards update that eliminates the option to present components of other comprehensive income as part of the statement of changes in equity and requires an entity to present items of net income and other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance also requires an entity to present on the face of the financial statements reclassification adjustments from other comprehensive income to net income. This guidance will be effective for fiscal years beginning after December 15, 2011, which will be the Company’s fiscal year 2012, with early adoption permitted. The Company does not expect the adoption of the guidance will have a material impact on the Company’s consolidated financial statements.
 
In May 2011, the FASB issued an accounting standards update that clarifies and amends the existing fair value measurement and disclosure requirements. This guidance will be effective prospectively for interim and annual periods beginning after December 15, 2011, which will be the Company’s fiscal year 2012, with early adoption prohibited. The Company does not expect the adoption of the guidance will have a material impact on the Company’s consolidated financial statements.
 
Note 2:  Acquisitions and Collaborations
 
Precision Light Acquisition
 
On August 8, 2011, the Company completed the acquisition of Precision Light, Inc. (Precision Light), a privately-held medical device company based in the United States focused on developing breast, facial and body imaging systems to simulate the outcome of aesthetic medical procedures, including breast surgery, for an upfront payment of $11.7 million, net of cash acquired. The Company is also required to pay additional contingent consideration based on the achievement of certain commercial milestones. The estimated fair value of the contingent consideration as of the acquisition date was $6.2 million. In connection with the acquisition, the Company acquired assets with a fair value of $28.5 million, consisting of an intangible asset of $20.4 million, non-current deferred tax assets of $1.5 million and goodwill of $6.6 million, and assumed liabilities of $10.6 million, consisting of current liabilities of $3.1 million and non-current deferred tax liabilities of $7.5 million. The intangible asset relates to distribution rights that have an estimated useful life of five years. As of September 30, 2011, the total estimated fair value of the contingent consideration of $6.2 million was included in “Other liabilities.”
 
Vicept Acquisition
 
On July 22, 2011, the Company completed the acquisition of Vicept Therapeutics, Inc. (Vicept), a privately-held dermatology company based in the United States focused on developing a novel compound to treat erythema (redness) associated with rosacea, for an upfront payment of $74.1 million, net of cash acquired, plus up to an aggregate of $200.0 million in payments contingent upon achieving certain future development and regulatory milestones plus additional payments contingent upon acquired products achieving certain sales milestones. The estimated fair value of the contingent
 
7

ALLERGAN, INC.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
consideration as of the acquisition date was $163.0 million. In connection with the acquisition, the Company acquired assets with a fair value of $343.4 million, consisting of an in-process research and development asset of $287.0 million, non-current deferred tax assets of $6.5 million and goodwill of $49.9 million, and assumed liabilities of $106.3 million, consisting of current liabilities of $2.2 million and non-current deferred tax liabilities of $104.1 million. As of September 30, 2011, the total estimated fair value of the contingent consideration of $163.0 million was included in “Other liabilities.”
 
The Company estimated the fair value of the contingent consideration liabilities related to the achievement of future development and regulatory milestones by assigning an achievement probability to each potential milestone and discounting the associated cash payment to its present value using a risk-adjusted rate of return. The Company estimated the fair value of the contingent consideration liabilities associated with sales milestones by employing Monte Carlo simulations to estimate the volatility and systematic relative risk of acquired product revenues and discounting the associated cash payment amounts to their present values using a credit-risk-adjusted interest rate.
 
The in-process research and development asset relates to Vicept’s lead investigational product, V-101, a topical cream for the treatment of the erythema (redness) associated with rosacea, which is currently in Phase II clinical trials. The estimated fair value of the in-process research and development asset was determined based on the use of a discounted cash flow model using an income approach for the acquired technology. Estimated revenues were probability adjusted to take into account the stage of completion and the risks surrounding successful development and commercialization. The in-process research and development asset is classified as an indefinite-lived intangible asset until the successful completion and commercialization or abandonment of the associated research and development efforts.
 
The Company believes that the fair values assigned to the assets acquired, liabilities assumed and the contingent consideration liabilities were based on reasonable assumptions.
 
Purchase of Distributor’s Business in South Africa
 
On July 1, 2011, the Company terminated its existing distributor agreement in South Africa and completed the purchase from its distributor of all assets related to the selling and distribution of the Company’s products in South Africa. The termination of the existing distributor agreement and purchase of the commercial assets enabled the Company to initiate direct operations in South Africa.
 
The purchase of the commercial assets was accounted for as a business combination. In connection with the purchase of the assets, the Company paid $8.6 million, net of a $2.2 million pre-existing third-party receivable from the distributor. The Company acquired assets with a fair value of $12.2 million, consisting of inventories of $5.6 million, an intangible asset of $3.9 million and goodwill of $2.7 million, and assumed liabilities of $1.4 million, consisting of accrued liabilities of $0.3 million and non-current deferred tax liabilities of $1.1 million. The intangible asset relates to distribution rights that have an estimated useful life of ten years.
 
Alacer Acquisition
 
On June 17, 2011, the Company completed the acquisition of Alacer Biomedical, Inc. (Alacer), a development stage medical device company focused on tissue reinforcement, for an aggregate purchase price of approximately $7.0 million, net of cash acquired. In connection with the acquisition, the Company acquired assets with a fair value of $12.3 million, consisting of intangible assets of $9.0 million, non-current deferred tax assets of $0.4 million and goodwill of $2.9 million, and assumed liabilities of $5.3 million, consisting of accrued liabilities of $2.0 million and non-current deferred tax liabilities of $3.3 million.
 
Purchase of Distributor’s Business in Turkey
 
On July 1, 2010, the Company terminated its existing distributor agreement in Turkey and completed the purchase from its distributor of all licenses, registrations and other assets related to the selling of the Company’s products in Turkey. Additionally, former employees of the distributor who were primarily engaged in the selling and marketing of the Company’s products were transferred to the Company on that date. The termination of the existing distributor agreement and purchase of the commercial assets enabled the Company to initiate direct selling operations in Turkey.
 
In conjunction with the termination of the existing distributor agreement, the Company paid $33.0 million, including a termination fee and related taxes, which was included in selling, general and administrative (SG&A) expenses in the third quarter of 2010. The purchase of the commercial assets was accounted for as a business combination. In connection with the purchase of the assets, the Company paid $6.1 million and is required to pay additional contingent consideration based on specified percentages of revenue in Turkey over a five year period from the acquisition date. The estimated fair value of the
 
8

ALLERGAN, INC.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
contingent consideration as of the acquisition date was $36.7 million. The Company recognized goodwill of $31.5 million and intangible assets of $11.3 million based on their estimated fair values at the purchase date. No liabilities were assumed in connection with the purchase. During the nine month period ended September 30, 2011, the Company recognized $2.3 million of expense related to the change in the estimated fair value of the contingent consideration liability, which is included in SG&A expenses, and made contingent consideration payments of $3.0 million. As of September 30, 2011, the total estimated fair value of the contingent consideration was $36.5 million, of which $4.5 million was included in “Other accrued expenses” and $32.0 million was included in “Other liabilities.”
 
Serica Acquisition
 
On January 15, 2010, the Company completed the acquisition of Serica Technologies, Inc. (Serica), a development stage medical device company based in the United States focused on developing biodegradable silk-based scaffolds for use in tissue reinforcement, for an aggregate purchase price of approximately $63.7 million, net of cash acquired. In connection with the acquisition, the Company acquired assets with a fair value of $96.0 million and assumed liabilities of $32.3 million. The acquisition was funded from the Company’s cash and equivalents balances. The Serica acquisition provides the Company with an approved technology that has potential future application in a variety of medical device applications.
 
The Company does not consider the business combinations noted above to be material, either individually or in the aggregate. The Company’s fair value estimates may change during the allowable measurement period, which is up to one year from the acquisition date, if additional information becomes available.
 
Collaborations
 
In March 2010, the Company and Serenity Pharmaceuticals, LLC (Serenity) entered into an agreement for the license, development and commercialization of a Phase III investigational drug currently in clinical development for the treatment of nocturia, a common urological disorder in adults characterized by frequent urination at night time. Under the terms of the agreement, the Company receives exclusive worldwide rights to develop, manufacture and commercialize the investigational drug for all potential indications except primary nocturnal enuresis (pediatric bedwetting). In conjunction with the agreement, the Company made an upfront payment to Serenity of $43.0 million in 2010. The terms of the agreement also include potential future development and regulatory milestone payments to Serenity of up to $122.0 million, as well as potential future sales milestone and royalty payments. Because the technology has not yet achieved regulatory approval, the Company recorded the upfront payment of $43.0 million as research and development (R&D) expense in the first quarter of 2010.
 
In December 2010, the Company and Serenity executed a letter agreement which specified certain terms and conditions governing additional development activities for a new Phase III trial which were not set forth in the original agreement. Under the letter agreement, the Company has agreed to share 50% of the cost of additional development activities. The execution of the letter agreement was a reconsideration event for the Company’s variable interest in the collaboration agreement with Serenity, and since the Company is providing a significant amount of the funding for the new Phase III trial, it determined that Serenity had become a variable interest entity (VIE). However, the Company determined that it is not the primary beneficiary of the VIE because it does not possess the power to direct Serenity’s research and development activities, which are the activities that most significantly impact Serenity’s economic performance. The Company’s maximum exposure to loss is the upfront payment of $43.0 million made to Serenity and any shared costs of additional development activities.
 
On January 28, 2011, the Company entered into a collaboration agreement and a co-promotion agreement with MAP Pharmaceuticals, Inc. (MAP) for the exclusive development and commercialization by the Company and MAP of Levadex ® within the United States to certain headache specialist physicians for the acute treatment of migraine in adults, migraine in adolescents and other indications that may be approved by the parties. Levadex ® is a self-administered, orally inhaled therapy consisting of a proprietary formulation of dihydroergotamine delivered using MAP’s proprietary Tempo ® delivery system, which has completed Phase III clinical development for the acute treatment of migraine in adults. Under the terms of the agreements, the Company made a $60.0 million upfront payment to MAP in February 2011, which was recorded as SG&A expense in the first quarter of 2011. The terms of the agreements also include up to $97.0 million in additional payments to MAP upon MAP meeting certain development and regulatory milestones. In August 2011, the Company made a $20.0 million milestone payment to MAP for the U.S. Food and Drug Administration (FDA) acceptance of its New Drug Application for Levadex ® , which was recorded as SG&A expense in the third quarter of 2011. The upfront and milestone payments were expensed because Levadex ® has not yet achieved regulatory approval. If Levadex ® receives FDA approval, the Company and MAP will equally share profits from sales of Levadex ® generated from its commercialization to neurologists and pain specialists in the United States.
 
9

ALLERGAN, INC.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
On May 4, 2011, the Company announced a license agreement with Molecular Partners AG pursuant to which the Company obtained exclusive global rights in the field of ophthalmology for MP0112, a Phase II proprietary therapeutic DARPin ® protein targeting vascular endothelial growth factor receptors under investigation for the treatment of retinal diseases. Under the terms of the agreement, the Company made a $45.0 million upfront payment to Molecular Partners AG in May 2011, which was recorded as R&D expense in the second quarter of 2011. The terms of the agreement also include potential future development, regulatory and sales milestone payments to Molecular Partners AG of up to $375.0 million, as well as potential future royalty payments.
 
Note 3:  Restructuring Charges and Integration Costs

Discontinued Development of EasyBand
 
In March 2011, the Company decided to discontinue development of the EasyBand Remote Adjustable Gastric Band System ( EasyBand ), a technology that the Company acquired in connection with its 2007 acquisition of EndoArt SA, and close the related research and development facility in Switzerland.
 
As a result of discontinuing the development of EasyBand and the closure of the related research and development facility, in the first quarter of 2011 the Company recorded a pre-tax impairment charge of $16.1 million for the intangible assets associated with the EasyBand technology, fixed asset impairment charges of $2.3 million and a gain of $9.4 million from the substantially complete liquidation of the Company’s investment in a foreign subsidiary. In addition, the Company recorded $4.6 million of restructuring charges, consisting of $3.0 million of employee severance and other one-time termination benefits for approximately 30 people affected by the facility closure, $1.5 million of contract termination costs and $0.1 million of other related costs. In the second quarter of 2011, the Company recorded an additional $0.1 million of restructuring charges primarily related to contract termination costs and a reversal of fixed asset impairment charges of $0.1 million.
 
Other Restructuring Activities and Integration Costs
 
Included in the three and nine month periods ended September 30, 2011 are a $0.1 million restructuring charge reversal primarily for employee severance related to the Serica acquisition.
 
Included in the three and nine month periods ended September 30, 2010 are $0.1 million and $0.2 million, respectively, of restructuring charges for an abandoned leased facility related to the Company’s fiscal year 2005 restructuring and streamlining of its European operations. Included in the nine month period ended September 30, 2010 are $0.8 million of restructuring charges primarily for employee severance related to the Serica acquisition, $0.1 million of restructuring charges primarily for employee severance and other one-time termination benefits related to the Company’s fiscal year 2009 restructuring plan and a $0.3 million restructuring charge reversal primarily for employee severance, one-time termination benefits and contract termination costs related to the Company’s closure of its breast implant manufacturing facility in Arklow, Ireland.
 
Included in the three and nine month periods ended September 30, 2011 are $0.6 million and $2.2 million, respectively, of SG&A expenses related to transaction and integration costs associated with the purchase of various businesses and licensing, collaboration and co-promotion agreements. Included in the three month period ended September 30, 2010 are $0.3 million of SG&A expenses and $0.1 million of R&D expenses related to transaction and integration costs associated with the purchase of various businesses . Included in the nine month period ended September 30, 2010 are $1.8 million of SG&A expenses and $0.1 million of R&D expenses related to transaction and integration costs associated with the purchase of various businesses and a license, development and commercialization agreement .
 
10

ALLERGAN, INC.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
Note 4:  Intangibles and Goodwill
 
Intangibles
 
At September 30, 2011 and December 31, 2010, the components of intangibles and certain other related information were as follows:

   
September 30, 2011
   
December 31, 2010
 
   
Gross
Amount
   
Accumulated
Amortization
   
Weighted
Average
Amortization
Period
   
Gross
Amount
   
Accumulated
Amortization
   
Weighted
Average
Amortization
Period
 
   
(in millions)
   
(in years)
   
(in millions)
   
(in years)
 
Amortizable Intangible Assets:
                       
Developed technology
  $ 1,113.4     $ (414.5 )     13.5     $ 1,129.6     $ (353.2 )     13.4  
Customer relationships
    42.3       (42.3 )     3.1       42.3       (42.3 )     3.1  
Licensing
    185.7       (132.0 )     9.3       185.6       (116.7 )     9.3  
Trademarks
    27.1       (25.2 )     6.2       27.4       (24.2 )     6.3  
Core technology
    182.6       (68.9 )     15.2       189.6       (61.5 )     15.2  
Other
    38.5       (3.9 )     7.0       17.0       (1.9 )     9.1  
      1,589.6       (686.8 )     12.6       1,591.5       (599.8 )     12.7  
Unamortizable Intangible Assets:
                                               
In-process research and development
    296.0                     4.3                
    $ 1,885.6     $ (686.8 )           $ 1,595.8     $ (599.8 )        
 
Developed technology consists primarily of current product offerings, primarily breast aesthetics products, obesity intervention products, dermal fillers, skin care products and eye care products acquired in connection with business combinations, asset acquisitions and initial licensing transactions for products previously approved for marketing. Customer relationship assets consist of the estimated value of relationships with customers acquired in connection with the Company’s 2006 acquisition of Inamed Corporation (Inamed), primarily in the breast implant market in the United States. Licensing assets consist primarily of capitalized payments to third party licensors related to the achievement of regulatory approvals to commercialize products in specified markets and up-front payments associated with royalty obligations for products that have achieved regulatory approval for marketing. Core technology consists of proprietary technology associated with silicone gel breast implants, gastric bands and intragastric balloon systems acquired in connection with the Inamed acquisition, dermal filler technology acquired in connection with the Company’s 2007 acquisition of Groupe Cornéal Laboratoires and a drug delivery technology acquired in connection with the Company’s 2003 acquisition of Oculex Pharmaceuticals, Inc. Other intangible assets consist primarily of acquired product registration rights, distributor relationships, distribution rights, government permits and non-compete agreements. The in-process research and development assets consist of an intangible asset associated with technology that has not yet achieved regulatory approval acquired in connection with the Company’s acquisition of Vicept in July 2011 and an intangible asset associated with technology that is not yet commercialized acquired in connection with the Company’s acquisition of Alacer in June 2011.
 
In the first quarter of 2011, the Company recorded a pre-tax charge of $16.1 million related to the impairment of the developed technology and core technology associated with EasyBand as a result of the discontinued development of the technology. In the third quarter of 2011, the Company recorded a pre-tax charge of $4.3 million related to the impairment of an in-process research and development asset associated with a tissue reinforcement technology that has not yet achieved regulatory approval acquired in connection with the Company’s 2010 acquisition of Serica. The impairment charge was recognized because current estimates of the anticipated future undiscounted cash flows of the asset were not sufficient to recover its carrying amount.
 
The following table provides amortization expense by major categories of acquired amortizable intangible assets for the three and nine month periods ended September 30, 2011 and 2010, respectively:
 
11

ALLERGAN, INC.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 
   
Three months ended
   
Nine months ended
 
   
September 30,
2011
   
September 30,
2010
   
September 30,
2011
   
September 30,
2010
 
   
(in millions)
   
(in millions)
 
Developed technology
  $ 22.4     $ 21.3     $ 67.4     $ 74.7  
Customer relationships
                      0.3  
Licensing
    5.1       5.1       15.3       17.0  
Trademarks
    0.1       1.1       1.3       3.3  
Core technology
    3.0       3.1       9.3       9.3  
Other
    1.3       0.5       2.3       0.9  
    $ 31.9     $ 31.1     $ 95.6     $ 105.5  
 
Amortization expense related to acquired intangible assets generally benefits multiple business functions within the Company, such as the Company’s ability to sell, manufacture, research, market and distribute products, compounds and intellectual property. The amount of amortization expense excluded from cost of sales consists primarily of amounts amortized with respect to developed technology and licensing intangible assets.
 
Estimated amortization expense is $126.9 million for 2011, $123.9 million for 2012, $109.7 million for 2013, $104.8 million for 2014 and $99.8 million for 2015.
 
Goodwill
 
Changes in the carrying amount of goodwill by operating segment through September 30, 2011 were as follows:

   
Specialty
  Pharmaceuticals
   
Medical
Devices
   
Total
 
   
(in millions)
 
Balance at December 31, 2010
  $ 106.4     $ 1,932.2     $ 2,038.6  
Vicept acquisition
    49.9             49.9  
Precision Light acquisition
          6.6       6.6  
Purchase of distributor’s business in South Africa
    2.7             2.7  
Alacer acquisition
          2.9       2.9  
Foreign exchange translation effects
    (7.7 )     0.2       (7.5 )
Balance at September 30, 2011
  $ 151.3     $ 1,941.9     $ 2,093.2  
 
Note 5:  Inventories
 
Components of inventories were:

   
September 30,
2011
   
December 31,
2010
 
   
(in millions)
 
Finished products
  $ 161.8     $ 148.2  
Work in process
    32.6       41.1  
Raw materials
    47.7       40.1  
Total
  $  242.1     $  229.4  
 
At September 30, 2011 and December 31, 2010, approximately $7.5 million and $6.4 million, respectively, of the Company’s finished goods inventories, primarily breast implants, were held on consignment at a large number of doctors’ offices, clinics and hospitals worldwide. The value and quantity at any one location are not significant.
 
Note 6:  Convertible Notes
 
In 2006, the Company issued its 1.50% Convertible Senior Notes due 2026 (2026 Convertible Notes) for an aggregate principal amount of $750.0 million. The 2026 Convertible Notes were unsecured and paid interest semi-annually on the principal amount of the notes at a rate of 1.50% per annum. The 2026 Convertible Notes were scheduled to mature on April 1, 2026, unless previously redeemed by the Company or earlier converted by the note holders. The Company was permitted to redeem the 2026 Convertible Notes at the principal amount plus accrued interest at any time on or after April 5, 2011.
 
12

ALLERGAN, INC.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
The 2026 Convertible Notes were convertible into cash and, if applicable, shares of the Company’s common stock based on a conversion rate of 15.7904 shares of the Company’s common stock per $1,000 principal amount of the 2026 Convertible Notes if the Company’s stock price reached certain specified thresholds or the Company called the 2026 Convertible Notes for redemption. The Company separately measured and accounted for the liability and equity components of the 2026 Convertible Notes.
 
In the first quarter of 2009, the Company paid $98.3 million to repurchase $100.3 million principal amount of the 2026 Convertible Notes. On March 8, 2011, the Company announced its intention to redeem the remaining 2026 Convertible Notes at the principal amount plus accrued interest on April 5, 2011. Most note holders elected to exercise the conversion feature of the 2026 Convertible Notes prior to redemption. Pursuant to the terms of the 2026 Convertible Notes, the Company elected to pay the full conversion value in cash. The conversion value of a note was based on an average of the daily closing price of the Company’s common stock over an averaging period that commenced after the Company received a conversion notice from a note holder. The Company paid approximately $800.3 million in aggregate conversion value for the converted notes at the end of the applicable averaging periods in May 2011. The difference between the amount paid and the principal amount of the converted notes of $641.1 million was recognized as a decrease to additional paid-in capital. In addition, on April 5, 2011 the Company redeemed notes with a principal amount of $8.6 million that were not converted.
 
Note 7:  Income Taxes
 
The provision for income taxes is determined using an estimated annual effective tax rate, which is generally less than the U.S. federal statutory rate, primarily because of lower tax rates in certain non-U.S. jurisdictions, R&D tax credits available in the United States, California and other foreign jurisdictions and deductions available in the United States for domestic production activities. The effective tax rate may be subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of pre-tax earnings in the various tax jurisdictions in which the Company operates, valuation allowances against deferred tax assets, the recognition or derecognition of tax benefits related to uncertain tax positions, expected utilization of R&D tax credits and changes in or the interpretation of tax laws in jurisdictions where the Company conducts business. The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of its assets and liabilities along with net operating loss and tax credit carryovers.
 
The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount that it believes is more likely than not to be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period such determination is made. The valuation allowance against deferred tax assets was $23.8 million and $4.3 million as of September 30, 2011 and December 31, 2010, respectively. The increase in the valuation allowance was primarily due to a corresponding increase in a deferred tax asset that the Company determined required a valuation allowance.
 
The total amount of unrecognized tax benefits was $43.1 million and $32.5 million as of September 30, 2011 and December 31, 2010, respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $37.1 million and $27.5 million as of September 30, 2011 and December 31, 2010, respectively. The Company expects that during the next 12 months it is reasonably possible that unrecognized tax benefit liabilities will decrease by approximately $8.0 million to $10.0 million due to the settlement of income tax audits in the United States and certain foreign jurisdictions.
 
Total interest accrued related to uncertain tax positions included in the Company’s unaudited condensed consolidated balance sheet was $7.5 million and $8.1 million as of September 30, 2011 and December 31, 2010, respectively. 
 
The Company has not provided for withholding and U.S. taxes for the unremitted earnings of certain non-U.S. subsidiaries because it has currently reinvested these earnings indefinitely in these foreign operations. At December 31, 2010, the Company had approximately $2,109.4 million in unremitted earnings outside the United States for which withholding and U.S. taxes were not provided. Income tax expense would be incurred if these funds were remitted to the United States. It is not practicable to estimate the amount of the deferred tax liability on such unremitted earnings. Upon remittance, certain foreign countries impose withholding taxes that are then available, subject to certain limitations, for use as credits against the Company’s U.S. tax liability, if any. The Company annually updates its estimate of unremitted earnings outside the United States after the completion of each fiscal year.
 
Note 8:  Share-Based Compensation
 
The Company recognizes compensation expense for all share-based awards made to employees and directors. The fair
 
13

ALLERGAN, INC.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
value of share-based awards is estimated at the grant date using the Black-Scholes option-pricing model and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period using the straight-line single option method. The fair value of modifications to share-based awards is generally estimated using a lattice model.
 
The determination of fair value using the Black-Scholes and lattice option-pricing models is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables, including expected stock price volatility, risk-free interest rate, expected dividends and projected employee stock option exercise behaviors. The Company currently estimates stock price volatility based upon an equal weighting of the historical average over the expected life of the award and the average implied volatility of at-the-money options traded in the open market. The Company estimates employee stock option exercise behavior based on actual historical exercise activity and assumptions regarding future exercise activity of unexercised, outstanding options.
 
Share-based compensation expense is recognized only for those awards that are ultimately expected to vest, and the Company has applied an estimated forfeiture rate to unvested awards for the purpose of calculating compensation cost. These estimates will be revised in future periods if actual forfeitures differ from the estimates. Changes in forfeiture estimates impact compensation cost in the period in which the change in estimate occurs.
 
For the three and nine month periods ended September 30, 2011 and 2010, share-based compensation expense was as follows:

   
Three months ended
   
Nine months ended
 
   
September 30,
2011
   
September 30,
2010
   
September 30,
2011
   
September 30,
2010
 
   
(in millions)
   
(in millions)
 
Cost of sales
  $ 1.3     $ 1.1     $ 4.2     $ 3.3  
Selling, general and administrative
    15.5       12.5       43.4       37.1  
Research and development
    5.6       4.5       16.7       13.0  
Pre-tax share-based compensation expense
    22.4       18.1       64.3       53.4  
Income tax benefit
    7.0       5.8       21.1       17.0  
Net share-based compensation expense
  $  15.4     $  12.3     $  43.2     $  36.4  
 
As of September 30, 2011, total compensation cost related to non-vested stock options and restricted stock not yet recognized was approximately $185.2 million, which is expected to be recognized over the next 48 months (33 months on a weighted-average basis). The Company has not capitalized as part of inventory any share-based compensation costs because such costs were negligible as of September 30, 2011.
 
Note 9:  Employee Retirement and Other Benefit Plans
 
The Company sponsors various qualified defined benefit pension plans covering a substantial portion of its employees. In addition, the Company sponsors two supplemental nonqualified plans covering certain management employees and officers and one retiree health plan covering U.S. retirees and dependents.
 
Components of net periodic benefit cost for the three and nine month periods ended September 30, 2011 and 2010, respectively, were as follows:

   
Three months ended
 
   
Pension Benefits
   
Other Postretirement Benefits
 
   
September 30, 
  2011
   
September 30, 
2010
   
September 30, 
2011
   
September 30, 
2010
 
   
(in millions)
   
(in millions)
 
Service cost
  $ 5.9     $ 5.1     $ 0.5     $ 0.5  
Interest cost
    10.6       9.6       0.8       0.8  
Expected return on plan assets
    (11.0 )     (11.4 )            
Amortization of prior service costs
                (0.1 )     (0.1 )
Recognized net actuarial losses
    4.3       2.5       0.3       0.3  
Net periodic benefit cost
  $ 9.8     $ 5.8     $ 1.5     $ 1.5  
 
 
14

ALLERGAN, INC.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
   
Nine months ended
 
   
Pension Benefits
   
Other Postretirement Benefits
 
   
September 30, 
  2011
   
September 30, 
2010
   
September 30, 
2011
   
September 30, 
2010
 
   
(in millions)
   
(in millions)
 
Service cost
  $ 17.9     $ 15.2     $ 1.6     $ 1.6  
Interest cost
    32.0       29.1       2.4       2.5  
Expected return on plan assets
    (33.2 )     (34.5 )            
Amortization of prior service costs
                (0.2 )     (0.2 )
Recognized net actuarial losses
    12.9       7.6       0.7       0.8  
Net periodic benefit cost
  $ 29.6     $ 17.4     $ 4.5     $ 4.7  
 
In 2011, the Company expects to pay contributions of between $35.0 million and $45.0 million for its U.S. and non-U.S. pension plans and between $1.0 million and $2.0 million for its other postretirement plan.
 
In June 2011, the Company made certain changes to its U.S. retiree health plan to incorporate health reimbursement arrangement accounts, transition plan participants to individual plans and cap future medical premium subsidies. In connection with the amendment, the Company remeasured its retiree health plan liability resulting in a reduction of accrued benefit costs associated with the plan of $20.5 million, a decrease in related deferred tax assets of $7.4 million, and an increase in net other comprehensive income of $13.1 million.
 
Note 10:  Legal Proceedings

The following supplements and amends the discussion set forth in Note 13 “Legal Proceedings” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 and Note 10 “Legal Proceedings” in the Company’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2011 and June 30, 2011 and is limited to certain recent developments concerning the Company’s legal proceedings.

Kramer et al. v. Allergan, Inc.

In September 2011, the court entered a dismissal with prejudice as to plaintiff Doolittle. In October 2011, the court set the trial as to plaintiff Powell for April 30, 2012.
 
Government Investigations
 
In September 2011, the Company received service of process of a Civil Investigative Demand from the Commonwealth of Massachusetts Office of the Attorney General, Medicaid Fraud Division. The Civil Investigative Demand requests production of documents and information relating to the Company’s Eye Care Business Advisor Group, Allergan Access and BSM Connect for Ophthalmology. 
 
Stockholder Derivative Litigation
 
Pompano Beach Police & Firefighters’ Retirement System Action; Himmel Action; Rosenbloom Action
 
In August 2011, the Company and the individual defendants filed a motion to dismiss the first amended verified consolidated complaint.
 
The Company is involved in various other lawsuits and claims arising in the ordinary course of business. These other matters are, in the opinion of management, immaterial both individually and in the aggregate with respect to the Company’s consolidated financial position, liquidity or results of operations. Because of the uncertainties related to the incurrence, amount and range of loss on any pending litigation, investigation, inquiry or claim, management is currently unable to predict the ultimate outcome of any litigation, investigation, inquiry or claim, determine whether a liability has been incurred or make an estimate of the reasonably possible liability that could result from an unfavorable outcome. The Company believes however, that the liability, if any, resulting from the aggregate amount of uninsured damages for any outstanding litigation, investigation, inquiry or claim will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations. However, an adverse ruling in a patent infringement lawsuit involving the Company could materially affect the Company’s ability to sell one or more of its products or could result in additional competition. In view of the unpredictable nature of such matters, the Company cannot provide any assurances regarding the outcome of any
 
15

ALLERGAN, INC.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
litigation, investigation, inquiry or claim to which the Company is a party or the impact on the Company of an adverse ruling in such matters.
 
Note 11:  Contingencies
 
In 2009, the Company established a reserve for a contingent liability associated with regulation changes resulting from a final rule issued by the U.S. Department of Defense (DoD) that placed retroactive and prospective pricing limits on certain branded pharmaceuticals under the TRICARE Retail Pharmacy Program, even though such branded pharmaceuticals have not historically been subject to a contract with the Company. As of September 30, 2011, the reserve for the contingent liability is $13.9 million and is included in “Other accrued expenses.”
 
In the third quarter of 2009, the Company entered into a co-promotion agreement with Quintiles Transnational Corp. (Quintiles), under which Quintiles co-promoted Sanctura XR ® , Latisse ® and Aczone ® , generally targeting primary care physicians. Due to significantly lower than anticipated performance under the agreement, the Company terminated this co-promotion agreement in the third quarter of 2010 and established a reserve for the contingent liability. In the second quarter of 2011, the Company settled all outstanding obligations with Quintiles and recorded additional costs of $3.3 million related to the settlement. The aggregate settlement amount, including such related costs, was within the previously disclosed estimated liability range.
 
Consistent with market practice, the Company recently elected to largely self-insure for future product liability losses related to Botox ® and Botox ® Cosmetic for injuries alleged to have occurred on or after June 1, 2011. Future product liability losses associated with Botox ® and Botox ® Cosmetic are, by their nature, uncertain and are based upon complex judgments and probabilities. The Company accrues for certain potential product liability losses estimated to be incurred, but not reported, to the extent they can be reasonably estimated. The Company estimates these accruals for potential losses based primarily on historical claims experience and data regarding product usage.
 
Note 12:  Guarantees
 
The Company’s Amended and Restated Certificate of Incorporation provides that the Company will indemnify, to the fullest extent permitted by the Delaware General Corporation Law, each person that is involved in or is, or is threatened to be, made a party to any action, suit or proceeding by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Company or was serving at the request of the Company as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise. The Company has also entered into contractual indemnity agreements with each of its directors and executive officers pursuant to which, among other things, the Company has agreed to indemnify such directors and executive officers against any payments they are required to make as a result of a claim brought against such executive officer or director in such capacity, excluding claims (i) relating to the action or inaction of a director or executive officer that resulted in such director or executive officer gaining illegal personal profit or advantage, (ii) for an accounting of profits made from the purchase or sale of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of any state law or (iii) that are based upon or arise out of such director’s or executive officer’s knowingly fraudulent, deliberately dishonest or willful misconduct. The maximum potential amount of future payments that the Company could be required to make under these indemnification provisions is unlimited. However, the Company has purchased directors’ and officers’ liability insurance policies intended to reduce the Company’s monetary exposure and to enable the Company to recover a portion of any future amounts paid. The Company has not previously paid any material amounts to defend lawsuits or settle claims as a result of these indemnification provisions, but makes no assurance that such amounts will not be paid in the future. The Company currently believes the estimated fair value of these indemnification arrangements is minimal.
 
The Company customarily agrees in the ordinary course of its business to indemnification provisions in agreements with clinical trials investigators in its drug, biologics and medical device development programs, in sponsored research agreements with academic and not-for-profit institutions, in various comparable agreements involving parties performing services for the Company in the ordinary course of business, and in its real estate leases. The Company also customarily agrees to certain indemnification provisions in its acquisition agreements and discovery and development collaboration agreements. With respect to the Company’s clinical trials and sponsored research agreements, these indemnification provisions typically apply to any claim asserted against the investigator or the investigator’s institution relating to personal injury or property damage, violations of law or certain breaches of the Company’s contractual obligations arising out of the research or clinical testing of the Company’s products, compounds or drug candidates. With respect to real estate lease agreements, the indemnification provisions typically apply to claims asserted against the landlord relating to personal injury or property damage caused by the Company, to violations of law by the Company or to certain breaches of the Company’s contractual obligations. The indemnification provisions appearing in the Company’s acquisition agreements and
 
16

ALLERGAN, INC.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
collaboration agreements are similar, but in addition often provide indemnification for the collaborator in the event of third party claims alleging infringement of intellectual property rights. In each of the above cases, the terms of these indemnification provisions generally survive the termination of the agreement. The maximum potential amount of future payments that the Company could be required to make under these provisions is generally unlimited. The Company has purchased insurance policies covering personal injury, property damage and general liability intended to reduce the Company’s exposure for indemnification and to enable the Company to recover a portion of any future amounts paid. The Company has not previously paid any material amounts to defend lawsuits or settle claims as a result of these indemnification provisions. As a result, the Company believes the estimated fair value of these indemnification arrangements is minimal.
 
Note 13:  Product Warranties
 
The Company provides warranty programs for breast implant sales primarily in the United States, Europe and certain other countries. Management estimates the amount of potential future claims from these warranty programs based on actuarial analyses. Expected future obligations are determined based on the history of product shipments and claims and are discounted to a current value. The liability is included in both current and long-term liabilities in the Company’s consolidated balance sheets. The U.S. programs include the ConfidencePlus ® and ConfidencePlus ® Premier warranty programs. The ConfidencePlus ® program currently provides lifetime product replacement, $1,200 of financial assistance for surgical procedures within ten years of implantation and contralateral implant replacement. The ConfidencePlus ® Premier program, which normally requires a low additional enrollment fee, generally provides lifetime product replacement, $2,400 of financial assistance for saline breast implants and $3,500 of financial assistance for silicone gel breast implants for surgical procedures within ten years of implantation and contralateral implant replacement. The enrollment fee is deferred and recognized as income over the ten year warranty period for financial assistance. The warranty programs in non-U.S. markets have similar terms and conditions to the U.S. programs. The Company does not warrant any level of aesthetic result and, as required by government regulation, makes extensive disclosures concerning the risks of the use of its products and breast implant surgery. Changes to actual warranty claims incurred and interest rates could have a material impact on the actuarial analysis and the Company’s estimated liabilities. A large majority of the product warranty liability arises from the U.S. warranty programs. The Company does not currently offer any similar warranty program on any other product.
 
The following table provides a reconciliation of the change in estimated product warranty liabilities through September 30, 2011:

   
(in millions)
 
Balance at December 31, 2010
  $ 30.1  
Provision for warranties issued during the period
    5.6  
Settlements made during the period
    (4.7 )
Increases in warranty estimates
    0.9  
Balance at September 30, 2011
  $ 31.9  
         
Current portion
  $ 6.7  
Non-current portion
    25.2  
Total
  $ 31.9  
 
 
17

ALLERGAN, INC.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
Note 14:  Earnings Per Share
 
The table below presents the computation of basic and diluted earnings (loss) per share:

   
Three months ended
   
Nine months ended
 
   
September 30,
  2011
   
September 30,
  2010
   
September 30,
  2011
   
September 30,
  2010
 
   
(in millions, except per share amounts)
 
                   
Net earnings (loss) attributable to Allergan, Inc.
  $  249.8     $ (670.5 )   $  654.7     $ (262.5 )
                                 
Weighted average number of shares outstanding
    304.2       302.8       304.4       303.2  
Net shares assumed issued using the treasury stock method for options and non-vested equity shares and share units outstanding during each period based on average market price
    5.6             5.5        
Dilutive effect of assumed conversion of convertible notes outstanding
           —       0.4        —  
Diluted shares
    309.8       302.8       310.3       303.2  
                                 
Earnings (loss) per share attributable to Allergan, Inc. stockholders:
                               
Basic
  $  0.82     $ (2.21 )   $  2.15     $ (0.87 )
Diluted
  $  0.81     $ (2.21 )   $  2.11     $ (0.87 )
 
For the three and nine month periods ended September 30, 2011, options to purchase 4.8 million shares of common stock at exercise prices ranging from $73.04 to $81.06 and $62.71 to $81.06 per share, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect from the assumed exercise of these options calculated under the treasury stock method would be anti-dilutive.
 
For the three and nine month periods ended September 30, 2010, outstanding stock options to purchase 27.1 million and 27.9 million shares of common stock at exercise prices ranging from $28.36 to $65.63 per share, respectively, were not included in the computation of diluted earnings per share because the Company incurred a loss from operations and, as a result, the impact would be anti-dilutive. Additionally, for the three and nine month periods ended September 30, 2010, the effect of approximately 0.1 million common shares related to the Company’s 2026 Convertible Notes was not included in the computation of diluted earnings per share because the Company incurred a loss from operations and, as a result, the impact would be anti-dilutive.
 
Note 15:  Comprehensive Income (Loss)
 
The following table summarizes the components of comprehensive income (loss) for the three and nine month periods ended September 30, 2011 and 2010:

   
Three months ended
 
   
September 30, 2011
   
September 30, 2010
 
   
Before Tax
Amount
   
Tax
(Expense)
or Benefit
   
Net-of-Tax
Amount
   
Before Tax
Amount
   
Tax
(Expense)
or Benefit
   
Net-of-Tax
Amount
 
   
(in millions)
 
Foreign currency translation adjustments
  $ (80.8 )   $     $ (80.8 )   $ 62.5     $     $ 62.5  
Amortization of deferred holding gains on derivatives designated as cash flow hedges
    (0.3 )     0.1       (0.2 )     (0.3 )     0.1       (0.2 )
Other comprehensive (loss) income
  $ (81.1 )   $ 0.1       (81.0 )   $ 62.2     $ 0.1       62.3  
Net earnings (loss)
                    251.0                       (668.7 )
Total comprehensive income (loss)
                    170.0                       (606.4 )
Comprehensive (loss) income attributable to noncontrolling interest
                    (1.1 )                     3.3  
Comprehensive income (loss) attributable to Allergan, Inc.
                  $ 171.1                     $ (609.7 )
 
 
18

ALLERGAN, INC.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 
   
Nine months ended
 
   
September 30, 2011
   
September 30, 2010
 
   
Before Tax
Amount
   
Tax
(Expense)
or Benefit
   
Net-of-Tax
Amount
   
Before Tax
Amount
   
Tax
(Expense)
or Benefit
   
Net-of-Tax
Amount
 
   
(in millions)
 
Foreign currency translation adjustments
  $ (30.5 )   $     $ (30.5 )   $ (1.5 )   $     $ (1.5 )
Reclassification adjustment for foreign currency translation gains included in net income from the substantially complete liquidation of an investment in a foreign subsidiary
    (9.4 )           (9.4 )                  
Amortization of deferred holding gains on derivatives designated as cash flow hedges
    (1.0 )     0.4       (0.6 )     (1.0 )     0.4       (0.6 )
Net gain on re-measurement of postretirement benefit plan liability
    20.5       (7.4 )     13.1                    
Other comprehensive loss
  $ (20.4 )   $ (7.0 )       (27.4 )   $ (2.5 )     $ 0.4       (2.1 )
Net earnings (loss)
                    658.4                       (258.2 )
Total comprehensive income (loss)
                    631.0                       (260.3 )
Comprehensive income attributable to noncontrolling interest
                    2.4                       4.9  
Comprehensive income (loss) attributable to Allergan, Inc.
                  $ 628.6                     $ (265.2 )
 
Note 16:  Financial Instruments
 
In the normal course of business, operations of the Company are exposed to risks associated with fluctuations in interest rates and foreign currency exchange rates. The Company addresses these risks through controlled risk management that includes the use of derivative financial instruments to economically hedge or reduce these exposures. The Company does not enter into derivative financial instruments for trading or speculative purposes.
 
The Company has not experienced any losses to date on its derivative financial instruments due to counterparty credit risk.
 
To ensure the adequacy and effectiveness of its interest rate and foreign exchange hedge positions, the Company continually monitors its interest rate swap positions and foreign exchange forward and option positions both on a stand-alone basis and in conjunction with its underlying interest rate and foreign currency exposures, from an accounting and economic perspective.
 
However, given the inherent limitations of forecasting and the anticipatory nature of the exposures intended to be hedged, the Company cannot assure that such programs will offset more than a portion of the adverse financial impact resulting from unfavorable movements in either interest or foreign exchange rates. In addition, the timing of the accounting for recognition of gains and losses related to mark-to-market instruments for any given period may not coincide with the timing of gains and losses related to the underlying economic exposures and, therefore, may adversely affect the Company’s consolidated operating results and financial position.
 
Interest Rate Risk Management
 
The Company’s interest income and expense is more sensitive to fluctuations in the general level of U.S. interest rates than to changes in rates in other markets. Changes in U.S. interest rates affect the interest earned on cash and equivalents and short-term investments and interest expense on debt, as well as costs associated with foreign currency contracts.
 
On January 31, 2007, the Company entered into a nine-year, two-month interest rate swap with a $300.0 million notional amount with semi-annual settlements and quarterly interest rate reset dates. The swap receives interest at a fixed rate of 5.75% and pays interest at a variable interest rate equal to 3-month LIBOR plus 0.368%, and effectively converts $300.0 million of the Company’s $800.0 million in aggregate principal amount of 5.75% Senior Notes due 2016 (2016 Notes) to a variable interest rate. Based on the structure of the hedging relationship, the hedge meets the criteria for using the short-cut method for a fair value hedge. The investment in the derivative and the related long-term debt are recorded at fair value. At September 30, 2011 and December 31, 2010, the Company recognized in its consolidated balance sheets an asset reported in “Investments and other assets” and a corresponding increase in “Long-term debt” associated with the fair value of the derivative of $49.0 million and $42.3 million, respectively. The differential to be paid or received as interest rates change
 
19

ALLERGAN, INC.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
is accrued and recognized as an adjustment of interest expense related to the 2016 Notes. During the three and nine month periods ended September 30, 2011, the Company recognized $3.7 million and $11.4 million, respectively, as a reduction of interest expense due to the differential to be received. During the three and nine month periods ended September 30, 2010, the Company recognized $3.8 million and $11.3 million, respectively, as a reduction of interest expense due to the differential to be received.
 
In February 2006, the Company entered into interest rate swap contracts based on 3-month LIBOR with an aggregate notional amount of $800.0 million, a swap period of 10 years and a starting swap rate of 5.198%. The Company entered into these swap contracts as a cash flow hedge to effectively fix the future interest rate for the 2016 Notes. In April 2006, the Company terminated the interest rate swap contracts and received approximately $13.0 million. The total gain was recorded to accumulated other comprehensive loss and is being amortized as a reduction to interest expense over a 10 year period to match the term of the 2016 Notes. During the three and nine month periods ended September 30, 2011 and 2010, the Company recognized $0.3 million and $1.0 million, respectively, as a reduction of interest expense due to the amortization of deferred holding gains on derivatives designated as cash flow hedges. These amounts were reclassified from accumulated other comprehensive loss. As of September 30, 2011, the remaining unrecognized gain of $5.9 million ($3.5 million, net of tax) is recorded as a component of accumulated other comprehensive loss. The Company expects to reclassify an estimated pre-tax amount of $1.3 million from accumulated other comprehensive loss as a reduction in interest expense during fiscal year 2011 due to the amortization of deferred holding gains.
 
No portion of amounts recognized from contracts designated as cash flow hedges was considered to be ineffective during the three and nine month periods ended September 30, 2011 and 2010, respectively.
 
Foreign Exchange Risk Management
 
Overall, the Company is a net recipient of currencies other than the U.S. dollar and, as such, benefits from a weaker dollar and is adversely affected by a stronger dollar relative to major currencies worldwide. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may negatively affect the Company’s consolidated revenues or operating costs and expenses as expressed in U.S. dollars.
 
From time to time, the Company enters into foreign currency option and forward contracts to reduce earnings and cash flow volatility associated with foreign exchange rate changes to allow management to focus its attention on its core business issues. Accordingly, the Company enters into various contracts which change in value as foreign exchange rates change to economically offset the effect of changes in the value of foreign currency assets and liabilities, commitments and anticipated foreign currency denominated sales and operating expenses. The Company enters into foreign currency option and forward contracts in amounts between minimum and maximum anticipated foreign exchange exposures, generally for periods not to exceed 18 months. The Company does not designate these derivative instruments as accounting hedges.
 
The Company uses foreign currency option contracts, which provide for the sale or purchase of foreign currencies to offset foreign currency exposures expected to arise in the normal course of the Company’s business. While these instruments are subject to fluctuations in value, such fluctuations are anticipated to offset changes in the value of the underlying exposures.
 
Probable but not firmly committed transactions are comprised of sales of products and purchases of raw material in currencies other than the U.S. dollar. A majority of these sales are made through the Company’s subsidiaries in Europe, Asia Pacific, Canada and Brazil. The Company purchases foreign exchange option contracts to economically hedge the currency exchange risks associated with these probable but not firmly committed transactions. The duration of foreign exchange hedging instruments, whether for firmly committed transactions or for probable but not firmly committed transactions, generally does not exceed 18 months.
 
All of the Company’s outstanding foreign currency option contracts are entered into to reduce the volatility of earnings generated in currencies other than the U.S. dollar, primarily earnings denominated in the Canadian dollar, Mexican peso, Australian dollar, Brazilian real, euro, Korean won and Turkish lira. Current changes in the fair value of open foreign currency option contracts and any realized gains (losses) on settled contracts are recorded through earnings as “Other, net” in the accompanying unaudited condensed consolidated statements of operations. During the three and nine month periods ended September 30, 2011, the Company recognized realized gains on settled foreign currency option contracts of $0.5 million and $1.2 million, respectively, and net unrealized gains on open foreign currency option contracts of $16.8 million and $12.0 million, respectively. During the three and nine month periods ended September 30, 2010, the Company recognized realized gains on settled foreign currency option contracts of $4.0 million and $11.8 million, respectively, and net unrealized losses on open foreign currency option contracts of $15.2 million and $7.0 million, respectively. The premium
 
20

ALLERGAN, INC.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
costs of purchased foreign exchange option contracts are recorded in “Other current assets” and amortized to “Other, net” over the life of the options.
 
All of the Company’s outstanding foreign exchange forward contracts are entered into to offset the change in value of certain intercompany receivables or payables that are subject to fluctuations in foreign currency exchange rates. The realized and unrealized gains and losses from foreign currency forward contracts and the revaluation of the foreign denominated intercompany receivables or payables are recorded through “Other, net” in the accompanying unaudited condensed consolidated statements of operations. During the three and nine month periods ended September 30, 2011, the Company recognized total realized and unrealized (losses) gains from foreign exchange forward contracts of $(1.0) million and $0.1 million, respectively. During the three and nine month periods ended September 30, 2010, the Company recognized total realized and unrealized (losses) gains from foreign exchange forward contracts of $(1.0) million and $3.2 million, respectively.
 
The fair value of outstanding foreign exchange option and forward contracts, collectively referred to as foreign currency derivative financial instruments, are recorded in “Other current assets” and “Accounts payable.” At September 30, 2011 and December 31, 2010, foreign currency derivative assets associated with the foreign exchange option contracts of $23.4 million and $10.4 million, respectively, were included in “Other current assets.” At September 30, 2011, net foreign currency derivative assets associated with the foreign exchange forward contracts of $0.8 million were included in “Other current assets.” At December 31, 2010, net foreign currency derivative liabilities associated with the foreign exchange forward contracts of $0.7 million were included in “Accounts payable.”
 
At September 30, 2011 and December 31, 2010, the notional principal and fair value of the Company’s outstanding foreign currency derivative financial instruments were as follows:

   
September 30, 2011
   
December 31, 2010
 
   
Notional
Principal
   
Fair
Value
   
Notional
Principal
   
Fair
Value
 
   
(in millions)
 
Foreign currency forward exchange contracts
(Receive U.S. dollar/pay foreign currency)
  $ 44.0     $ 1.9     $ 25.6     $ (0.9 )
Foreign currency forward exchange contracts
(Pay U.S. dollar/receive foreign currency)
    41.4       (1.1 )     39.9       0.2  
Foreign currency sold — put options
    333.3       23.4       346.4       10.4  
 
The notional principal amounts provide one measure of the transaction volume outstanding as of September 30, 2011 and December 31, 2010, and do not represent the amount of the Company’s exposure to market loss. The estimates of fair value are based on applicable and commonly used pricing models using prevailing financial market information as of September 30, 2011 and December 31, 2010. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.
 
Other Financial Instruments
 
At September 30, 2011 and December 31, 2010, the Company’s other financial instruments included cash and equivalents, short-term investments, trade receivables, equity investments, accounts payable and borrowings. The carrying amount of cash and equivalents, short-term investments, trade receivables and accounts payable approximates fair value due to the short-term maturities of these instruments. The fair value of non-marketable equity investments which represent investments in start-up technology companies or partnerships that invest in start-up technology companies, are estimated based on the fair value and other information provided by these ventures. The fair value of notes payable, convertible notes and long-term debt are estimated based on quoted market prices and interest rates.
 
The carrying amount and estimated fair value of the Company’s other financial instruments at September 30, 2011 and December 31, 2010 were as follows:
 
21

ALLERGAN, INC.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 

   
September 30, 2011
   
December 31, 2010
 
   
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
   
(in millions)
 
Cash and equivalents
  $ 2,212.0     $ 2,212.0     $ 1,991.2     $ 1,991.2  
Short-term investments
    66.5       66.5       749.1       749.1  
Non-current non-marketable equity investments
    12.2       12.2       7.7       7.7  
Notes payable
    78.8       79.7       28.1       28.1  
Convertible notes
                642.5       651.1  
Long-term debt
    1,516.2       1,692.6       1,534.2       1,612.3  
 
Concentration of Credit Risk
 
Financial instruments that potentially subject the Company to credit risk principally consist of trade receivables. Wholesale distributors, major retail chains and managed care organizations account for a substantial portion of trade receivables. This risk is limited due to the number of customers comprising the Company’s customer base, and their geographic dispersion. At September 30, 2011, no single customer represented more than 10% of trade receivables, net. Ongoing credit evaluations of customers’ financial condition are performed and, generally, no collateral is required. The Company has purchased an insurance policy intended to reduce the Company’s exposure to potential credit risks associated with certain U.S. customers. To date, no claims have been made against the insurance policy. The Company maintains reserves for potential credit losses and such losses, in the aggregate, have not exceeded management’s estimates.
 
Note 17:  Fair Value Measurements
 
The Company measures fair value based on the prices that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
As of September 30, 2011, the Company has certain assets and liabilities that are required to be measured at fair value on a recurring basis. These include cash equivalents, short-term investments, foreign exchange derivatives, the $300.0 million notional amount interest rate swap and contingent consideration liabilities. These assets and liabilities are classified in the table below in one of the three categories of the fair value hierarchy described above.

   
Total
   
Level 1
   
Level 2
   
Level 3
 
   
(in millions)
 
Assets
                       
Commercial paper
  $ 934.8     $     $ 934.8     $  
Foreign time deposits
    189.5             189.5        
Other cash equivalents
    991.6             991.6        
Foreign exchange derivative assets
    24.2             24.2        
Interest rate swap derivative asset
    49.0        —       49.0        —  
    $ 2,189.1     $     $ 2,189.1     $  
Liabilities
                               
Interest rate swap derivative liability
  $ 49.0     $     $ 49.0     $  
Contingent consideration liabilities
    205.7        —             205.7  
    $ 254.7     $     $ 49.0     $ 205.7  
 
Cash equivalents consist of commercial paper, foreign time deposits and other cash equivalents. Short-term investments consist of commercial paper. Cash equivalents and short-term investments are valued at cost, which approximates fair value due to the short-term maturities of these instruments. Foreign currency derivative assets and liabilities are valued using quoted forward foreign exchange prices and option volatility at the reporting date. The interest rate swap derivative asset and liability are valued using LIBOR yield curves at the reporting date. The Company believes the fair values assigned to its derivative instruments as of September 30, 2011 are based upon reasonable estimates and assumptions.
 
The contingent consideration liabilities represent future amounts the Company may be required to pay in conjunction
 
22

ALLERGAN, INC.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
with various business combinations. The ultimate amount of future payments is based on specified future criteria, such as sales performance and the achievement of certain future development, regulatory and sales milestones. The Company estimates the fair value of the contingent consideration liabilities related to sales performance using the income approach, which involves forecasting estimated future net cash flows and discounting the net cash flows to their present value using a risk-adjusted rate of return. The Company estimates the fair value of the contingent consideration liabilities related to the achievement of future development and regulatory milestones by assigning an achievement probability to each potential milestone and discounting the associated cash payment to its present value using a risk-adjusted rate of return. The Company estimates the fair value of the contingent consideration liabilities associated with sales milestones by employing Monte Carlo simulations to estimate the volatility and systematic relative risk of revenues subject to sales milestone payments and discounting the associated cash payment amounts to their present values using a credit-risk-adjusted interest rate. The Company evaluates its estimates of the fair value of contingent consideration liabilities on a periodic basis. Any changes in the fair value of contingent consideration liabilities are recorded through earnings as “Selling, general and administrative” in the accompanying unaudited condensed consolidated statements of operations.
 
 The following table provides a reconciliation of the change in the contingent consideration liabilities through September 30, 2011:

   
(in millions)
 
Balance at December 31, 2010
  $ 44.5  
Additions during the period related to business combinations
    169.2  
Change in the estimated fair value of the contingent consideration liabilities
    2.3  
Settlements made during the period
    (3.0 )
Foreign exchange translation effects
    (7.3 )
Balance at September 30, 2011
  $ 205.7  
 
Note 18:  Business Segment Information
 
The Company operates its business on the basis of two reportable segments — specialty pharmaceuticals and medical devices. The specialty pharmaceuticals segment produces a broad range of pharmaceutical products, including: ophthalmic products for dry eye, glaucoma, retinal diseases and external disease; Botox ® for certain therapeutic and aesthetic indications; skin care products for acne, psoriasis, eyelash growth and other prescription and over-the-counter skin care products; and urologics products. The medical devices segment produces a broad range of medical devices, including: breast implants for augmentation, revision and reconstructive surgery and tissue expanders; obesity intervention products, including the Lap-Band ® System and the Orbera Intragastric Balloon System; and facial aesthetics products. The Company provides global marketing strategy teams to ensure development and execution of a consistent marketing strategy for its products in all geographic regions that share similar distribution channels and customers.
 
The Company evaluates segment performance on a revenue and operating income basis exclusive of general and administrative expenses and other indirect costs, legal settlement expenses, impairment of intangible assets and related costs, restructuring charges, in-process research and development expenses, amortization of certain identifiable intangible assets related to business combinations and asset acquisitions and related capitalized licensing costs and certain other adjustments, which are not allocated to the Company’s segments for performance assessment by the Company’s chief operating decision maker. Other adjustments excluded from the Company’s segments for performance assessment represent income or expenses that do not reflect, according to established Company-defined criteria, operating income or expenses associated with the Company’s core business activities. Because operating segments are generally defined by the products they design and sell, they do not make sales to each other. The Company does not discretely allocate assets to its operating segments, nor does the Company’s chief operating decision maker evaluate operating segments using discrete asset information.
 
23

ALLERGAN, INC.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
Operating Segments

   
Three months ended
   
Nine months ended
 
   
September 30,
2011
   
September 30,
2010
   
September 30,
2011
   
September 30,
2010
 
   
(in millions)
   
(in millions)
 
Product net sales:
                       
Specialty pharmaceuticals
  $ 1,089.7     $ 989.3     $ 3,273.4     $ 2,909.8  
Medical devices
    221.4       202.7       690.9       619.7  
Total product net sales
    1,311.1       1,192.0       3,964.3       3,529.5  
Other corporate and indirect revenues
    17.3       16.2       52.5       80.6  
Total revenues
  $ 1,328.4     $ 1,208.2     $ 4,016.8     $ 3,610.1  
                                 
Operating income (loss):
                               
Specialty pharmaceuticals
  $ 433.5     $ 377.5     $ 1,286.3     $ 1,076.0  
Medical devices
    68.8       67.2       214.2       201.1  
Total segments
    502.3       444.7       1,500.5       1,277.1  
General and administrative expenses, other indirect costs and other adjustments
    127.7       131.4       439.2       318.2  
Amortization of acquired intangible assets (a)
    26.0       25.2       77.9       87.9  
Legal settlement
          609.9             609.9  
Impairment of intangible assets and related costs
    4.3       369.1       23.7       369.1  
Restructuring charges (reversal)
    (0.1 )     0.1       4.6       0.8  
Total operating income (loss)
  $ 344.4     $ (691.0 )   $ 955.1     $ (108.8 )
                                     
(a) Represents amortization of certain identifiable intangible assets related to business combinations and asset acquisitions and related capitalized licensing costs, as applicable.
 
Product net sales for the Company’s various global product portfolios are presented below. The Company’s principal markets are the United States, Europe, Latin America and Asia Pacific. The U.S. information is presented separately as it is the Company’s headquarters country. U.S. sales represented 59.3% and 62.6% of the Company’s total consolidated product net sales for the three month periods ended September 30, 2011 and 2010, respectively. U.S. sales represented 59.6% and 62.9% of the Company’s total consolidated product net sales for the nine month periods ended September 30, 2011 and 2010, respectively.
 
Sales to two customers in the Company’s specialty pharmaceuticals segment each generated over 10% of the Company’s total consolidated product net sales. Sales to Cardinal Health, Inc. for the three month periods ended September 30, 2011 and 2010 were 13.5% and 13.0%, respectively, of the Company’s total consolidated product net sales, and 13.6% and 13.1%, respectively, of the Company’s total consolidated product net sales for the nine month periods ended September 30, 2011 and 2010. Sales to McKesson Drug Company for the three month periods ended September 30, 2011 and 2010 were 13.1% and 12.8%, respectively, of the Company’s total consolidated product net sales and 13.1% and 12.5%, respectively, of the Company’s total consolidated product net sales for the nine month periods ended September 30, 2011 and 2010. No other country or single customer generates over 10% of the Company’s total consolidated product net sales. Net sales for the Europe region also include sales to customers in Africa and the Middle East, and net sales in the Asia Pacific region include sales to customers in Australia and New Zealand.
 
24

ALLERGAN, INC.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
Product Net Sales by Product Line

   
Three months ended
   
Nine months ended
 
   
September 30,
2011
   
September 30,
2010
   
September 30,
2011
   
September 30,
2010
 
   
(in millions)
   
(in millions)
 
Specialty Pharmaceuticals:
                       
Eye Care Pharmaceuticals
  $ 611.6     $ 568.8     $ 1,861.1     $ 1,658.6  
Botox ® /Neuromodulator
    396.7       341.7       1,179.6       1,033.2  
Skin Care
    66.4       61.4       190.4       171.3  
Urologics
    15.0       17.4       42.3       46.7  
Total Specialty Pharmaceuticals
    1,089.7       989.3       3,273.4       2,909.8  
                                 
Medical Devices:
                               
Breast Aesthetics
    83.3       74.9       262.9       234.4  
Obesity Intervention
    49.7       59.3       156.2       182.4  
Facial Aesthetics
    88.4       68.5       271.8       202.9  
Total Medical Devices
    221.4       202.7       690.9       619.7  
                                 
Total product net sales
  $ 1,311.1     $ 1,192.0     $ 3,964.3     $ 3,529.5  
 
Geographic Information
 
Product Net Sales
   
Three months ended
   
Nine months ended
 
   
September 30,
2011
   
September 30,
2010
   
September 30,
2011
   
September 30,
2010
 
   
(in millions)
   
(in millions)
 
United States
  $ 777.6     $ 745.9     $ 2,362.7     $ 2,220.4  
Europe
    261.0       223.6       825.9       683.2  
Latin America
    106.9       87.4       293.2       231.0  
Asia Pacific
    109.1       85.9       306.0       241.4  
Other
    56.5       49.2       176.5       153.5  
Total product net sales
  $ 1,311.1     $ 1,192.0     $ 3,964.3     $ 3,529.5  
 
Long-Lived Assets
   
September 30,
2011
   
December 31,
2010
 
   
(in millions)
 
United States
  $ 3,526.4     $ 3,222.4  
Europe
    504.2       563.1  
Latin America
    59.2       65.0  
Asia Pacific
    53.0       56.3  
Other
    2.9       3.7  
Total
  $ 4,145.7     $ 3,910.5  
 
The increase in long-lived assets located in the United States at September 30, 2011 compared to December 31, 2010 is primarily due to an increase in intangible assets and goodwill related to the acquisitions of Vicept and Precision Light completed in the third quarter of 2011 and the acquisition of Alacer completed in the second quarter of 2011.
 
25

AL LERGAN, INC.
 
Item 2 .  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
This financial review presents our operating results for the three and nine month periods ended September 30, 2011 and 2010, and our financial condition at September 30, 2011. The following discussion contains forward-looking statements which are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. We discuss such risks, uncertainties and other factors throughout this report and specifically under the caption “Risk Factors” in Part II, Item 1A below. The following review should be read in connection with the information presented in our unaudited condensed consolidated financial statements and related notes for the three and nine month periods ended September 30, 2011 included in this report and our audited consolidated financial statements and related notes for the year ended December 31, 2010 included in our 2010 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission. 
 
Critical Accounting Policies, Estimates and Assumptions
 
The preparation and presentation of financial statements in conformity with accounting principles generally accepted in the United States, or GAAP, requires us to establish policies and to make estimates and assumptions that affect the amounts reported in our consolidated financial statements. In our judgment, the accounting policies, estimates and assumptions described below have the greatest potential impact on our consolidated financial statements. Accounting assumptions and estimates are inherently uncertain and actual results may differ materially from our estimates.
 
Revenue Recognition
 
We recognize revenue from product sales when goods are shipped and title and risk of loss transfer to our customers. A substantial portion of our revenue is generated by the sale of specialty pharmaceutical products (primarily eye care pharmaceuticals, skin care and urologics products) to wholesalers within the United States, and we have a policy to attempt to maintain average U.S. wholesaler inventory levels at an amount less than eight weeks of our net sales. A portion of our revenue is generated from consigned inventory of breast implants maintained at physician, hospital and clinic locations. These customers are contractually obligated to maintain a specific level of inventory and to notify us upon the use of consigned inventory. Revenue for consigned inventory is recognized at the time we are notified by the customer that the product has been used. Notification is usually through the replenishing of the inventory, and we periodically review consignment inventories to confirm the accuracy of customer reporting.
 
We generally offer cash discounts to customers for the early payment of receivables. Those discounts are recorded as a reduction of revenue and accounts receivable in the same period that the related sale is recorded. The amounts reserved for cash discounts were $4.2 million and $4.4 million at September 30, 2011 and December 31, 2010, respectively. Provisions for cash discounts deducted from consolidated sales in the third quarter of 2011 and 2010 were $15.4 million and $13.9 million, respectively. Provisions for cash discounts deducted from consolidated sales in the first nine months of 2011 and 2010 were $45.6 million and $40.0 million, respectively.
 
We permit returns of product from most product lines by any class of customer if such product is returned in a timely manner, in good condition and from normal distribution channels. Return policies in certain international markets and for certain medical device products, primarily breast implants, provide for more stringent guidelines in accordance with the terms of contractual agreements with customers. Our estimates for sales returns are based upon the historical patterns of product returns matched against sales, and management’s evaluation of specific factors that may increase the risk of product returns. The amount of allowances for sales returns recognized in our consolidated balance sheets at September 30, 2011 and December 31, 2010 were $60.9 million and $52.3 million, respectively, and are recorded in “Other accrued expenses” and “Trade receivables, net” in our consolidated balance sheets. Provisions for sales returns deducted from consolidated sales were $95.1 million and $91.4 million in the third quarter of 2011 and 2010, respectively. Provisions for sales returns deducted from consolidated sales were $307.8 million and $283.2 million in the first nine months of 2011 and 2010, respectively. The increases in the amount of allowances for sales returns at September 30, 2011 compared to December 31, 2010 and the provisions for sales returns in the third quarter and the first nine months of 2011 compared to the third quarter and the first nine months of 2010 are primarily due to increased sales returns related to breast implant products, principally due to increased product sales volume, and an increase in estimated product return rates for our skin care products. Historical allowances for cash discounts and product returns have been consistent with the amounts reserved or accrued.
 
We participate in various managed care sales rebate and other incentive programs, the largest of which relates to Medicaid, Medicare and the U.S. Department of Veterans Affairs. Sales rebate and other incentive programs also include contractual volume rebate programs and chargebacks, which are contractual discounts given primarily to federal government agencies, health maintenance organizations, pharmacy benefits managers and group purchasing organizations. We also offer
 
26

rebate and other incentive programs for our aesthetic products and certain therapeutic products, including Botox ® Cosmetic, Juvéderm ® , Latisse ® , Acuvail ® , Aczone ® , Sanctura XR ®   and Restasis ® , and for certain other skin care products. Sales rebates and incentive accruals reduce revenue in the same period that the related sale is recorded and are included in “Other accrued expenses” in our consolidated balance sheets. The amounts accrued for sales rebates and other incentive programs were $238.6 million and $186.5 million at September 30, 2011 and December 31, 2010, respectively. Provisions for sales rebates and other incentive programs deducted from consolidated sales were $199.0 million and $149.7 million in the third quarter of 2011 and 2010, respectively. Provisions for sales rebates and other incentive programs deducted from consolidated sales were $555.7 million and $414.7 million in the first nine months of 2011 and 2010, respectively. The increases in the amounts accrued at September 30, 2011 compared to December 31, 2010 and the provisions for sales rebates and other incentive programs in the third quarter and the first nine months of 2011 compared to the third quarter and the first nine months of 2010 are primarily due to an increase in activity under previously established rebate and incentive programs, principally related to our eye care pharmaceuticals, Botox ® Cosmetic, urology, skin care and facial aesthetics products, an increase in the number of incentive programs offered, additional contractual discounts to federal government agencies related to the recently enacted health care reform legislation and increased overall product sales volume. In addition, an increase in our published list prices in the United States for pharmaceutical products, which occurred for several of our products in each of 2011 and 2010, generally results in higher provisions for sales rebates and other incentive programs deducted from consolidated sales.
 
Our procedures for estimating amounts accrued for sales rebates and other incentive programs at the end of any period are based on available quantitative data and are supplemented by management’s judgment with respect to many factors, including but not limited to, current market dynamics, changes in contract terms, changes in sales trends, an evaluation of current laws and regulations and product pricing. Quantitatively, we use historical sales, product utilization and rebate data and apply forecasting techniques in order to estimate our liability amounts. Qualitatively, management’s judgment is applied to these items to modify, if appropriate, the estimated liability amounts. There are inherent risks in this process. For example, customers may not achieve assumed utilization levels; customers may misreport their utilization to us; and actual movements of the U.S. Consumer Price Index for All Urban Consumers, or CPI-U, which affect our rebate programs with U.S. federal and state government agencies, may differ from those estimated. On a quarterly basis, adjustments to our estimated liabilities for sales rebates and other incentive programs related to sales made in prior periods have not been material and have generally been less than 0.5% of consolidated product net sales. An adjustment to our estimated liabilities of 0.5% of consolidated product net sales on a quarterly basis would result in an increase or decrease to net sales and earnings before income taxes of approximately $7.0 million to $8.0 million. The sensitivity of our estimates can vary by program and type of customer. Additionally, there is a significant time lag between the date we determine the estimated liability and when we actually pay the liability. Due to this time lag, we record adjustments to our estimated liabilities over several periods, which can result in a net increase to earnings or a net decrease to earnings in those periods. Material differences may result in the amount of revenue we recognize from product sales if the actual amount of rebates and incentives differ materially from the amounts estimated by management.
 
We recognize license fees, royalties and reimbursement income for services provided as other revenues based on the facts and circumstances of each contractual agreement. In general, we recognize income upon the signing of a contractual agreement that grants rights to products or technology to a third party if we have no further obligation to provide products or services to the third party after entering into the contract. We recognize contingent consideration earned from the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. We defer income under contractual agreements when we have further obligations that indicate that a separate earnings process has not been completed.
 
Contingent Consideration
 
Contingent consideration liabilities represent future amounts we may be required to pay in conjunction with various business combinations. The ultimate amount of future payments is based on specified future criteria, such as sales performance and the achievement of certain future development, regulatory and sales milestones. We estimate the fair value of the contingent consideration liabilities related to sales performance using the income approach, which involves forecasting estimated future net cash flows and discounting the net cash flows to their present value using a risk-adjusted rate of return. We estimate the fair value of the contingent consideration liabilities related to the achievement of future development and regulatory milestones by assigning an achievement probability to each potential milestone and discounting the associated cash payment to its present value using a risk-adjusted rate of return. We estimate the fair value of the contingent consideration liabilities associated with sales milestones by employing Monte Carlo simulations to estimate the volatility and systematic relative risk of revenues subject to sales milestones and discounting the associated cash payment amounts to their present values using a credit-risk-adjusted interest rate. We evaluate our estimates of the fair value of contingent consideration liabilities on a periodic basis. Any changes in the fair value of contingent consideration liabilities are recorded through earnings as “Selling, general and administrative” in the accompanying unaudited condensed consolidated statements of operations. The total estimated fair value of contingent consideration liabilities was $205.7 million and $44.5 million at
 
27

September 30, 2011 and December 31, 2010, respectively, and were included in “Other accrued expenses” and “Other liabilities” in our consolidated balance sheets. The increase in the amount of contingent consideration liabilities at September 30, 2011 compared to December 31, 2010 is primarily due to the acquisitions of Vicept Therapeutics, Inc., or Vicept, and Precision Light, Inc., or Precision Light, in the third quarter of 2011.
 
Pensions
 
We sponsor various pension plans in the United States and abroad in accordance with local laws and regulations. Our U.S. pension plans account for a large majority of our aggregate pension plans’ net periodic benefit costs and projected benefit obligations. In connection with these plans, we use certain actuarial assumptions to determine the plans’ net periodic benefit costs and projected benefit obligations, the most significant of which are the expected long-term rate of return on assets and the discount rate.
 
Our assumption for the weighted average expected long-term rate of return on assets in our U.S. funded pension plan for determining the net periodic benefit cost is 7.25% and 8.25% for 2011 and 2010, respectively. Our assumptions for the weighted average expected long-term rate of return on assets in our non-U.S. funded pension plans are 5.70% and 5.85% for 2011 and 2010, respectively. For our U.S. funded pension plan, we determine, based upon recommendations from our pension plan’s investment advisors, the expected rate of return using a building block approach that considers diversification and rebalancing for a long-term portfolio of invested assets. Our investment advisors study historical market returns and preserve long-term historical relationships between equities and fixed income in a manner consistent with the widely-accepted capital market principle that assets with higher volatility generate a greater return over the long run. They also evaluate market factors such as inflation and interest rates before long-term capital market assumptions are determined. For our non-U.S. funded pension plans, the expected rate of return was determined based on asset distribution and assumed long-term rates of return on fixed income instruments and equities. Market conditions and other factors can vary over time and could significantly affect our estimates of the weighted average expected long-term rate of return on plan assets. The expected rate of return is applied to the market-related value of plan assets. As a sensitivity measure, the effect of a 0.25% decline in our rate of return on assets assumptions for our U.S. and non-U.S. funded pension plans would increase our expected 2011 pre-tax pension benefit cost by approximately $1.6 million.
 
The weighted average discount rates used to calculate our U.S. and non-U.S. pension benefit obligations at December 31, 2010 were 5.51% and 5.57%, respectively. The weighted average discount rates used to calculate our U.S. and non-U.S. net periodic benefit costs for 2011 were 5.51% and 5.57%, respectively, and for 2010 were 6.04% and 6.16%, respectively. We determine the discount rate based upon a hypothetical portfolio of high quality fixed income investments with maturities that mirror the pension benefit obligations at the plans’ measurement date. Market conditions and other factors can vary over time and could significantly affect our estimates for the discount rates used to calculate our pension benefit obligations and net periodic benefit costs for future years. As a sensitivity measure, the effect of a 0.25% decline in the discount rate assumption for our U.S. and non-U.S. pension plans would increase our expected 2011 pre-tax pension benefit costs by approximately $4.1 million and increase our pension plans’ projected benefit obligations at December 31, 2010 by approximately $34.7 million.
 
Share-Based Compensation
 
We recognize compensation expense for all share-based awards made to employees and directors. The fair value of share-based awards is estimated at the grant date using the Black-Scholes option-pricing model and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period using the straight-line single option method. The fair value of modifications to share-based awards is generally estimated using a lattice model.
 
The determination of fair value using the Black-Scholes and lattice option-pricing models is affected by our stock price as well as assumptions regarding a number of complex and subjective variables, including expected stock price volatility, risk-free interest rate, expected dividends and projected employee stock option exercise behaviors. We currently estimate stock price volatility based upon an equal weighting of the historical average over the expected life of the award and the average implied volatility of at-the-money options traded in the open market. We estimate employee stock option exercise behavior based on actual historical exercise activity and assumptions regarding future exercise activity of unexercised, outstanding options.
 
Share-based compensation expense is recognized only for those awards that are ultimately expected to vest, and we have applied an estimated forfeiture rate to unvested awards for the purpose of calculating compensation cost. These estimates will be revised in future periods if actual forfeitures differ from the estimates. Changes in forfeiture estimates impact compensation cost in the period in which the change in estimate occurs.
Product Liability Self-Insurance
 
Consistent with market practice in our industry, we recently elected to largely self-insure for future product liability losses related to Botox ® and Botox ® Cosmetic for injuries alleged to have occurred on or after June 1, 2011. Future product liability losses associated with Botox ® and Botox ® Cosmetic are, by their nature, uncertain and are based upon complex judgments and probabilities. The factors to consider in developing product liability reserves include the merits and jurisdiction of each claim, the nature and the number of other similar current and past claims, the nature of the product use and the likelihood of settlement. In addition, we accrue for certain potential product liability losses estimated to be incurred, but not reported, to the extent they can be reasonably estimated. We estimate these accruals for potential losses based primarily on historical claims experience and data regarding product usage.
 
Income Taxes
 
The provision for income taxes is determined using an estimated annual effective tax rate, which is generally less than the U.S. federal statutory rate, primarily because of lower tax rates in certain non-U.S. jurisdictions, research and development, or R&D, tax credits available in the United States, California and other foreign jurisdictions and deductions available in the United States for domestic production activities. Our effective tax rate may be subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of pre-tax earnings in the various tax jurisdictions in which we operate, valuation allowances against deferred tax assets, the recognition or derecognition of tax benefits related to uncertain tax positions, expected utilization of R&D tax credits and changes in or the interpretation of tax laws in jurisdictions where we conduct business. We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities along with net operating loss and tax credit carryovers. 
 
We record a valuation allowance against our deferred tax assets to reduce the net carrying value to an amount that we believe is more likely than not to be realized. When we establish or reduce the valuation allowance against our deferred tax assets, our provision for income taxes will increase or decrease, respectively, in the period such determination is made. Valuation allowances against deferred tax assets were $23.8 million and $4.3 million at September 30, 2011 and December 31, 2010, respectively. The increase in the valuation allowance was primarily due to a corresponding increase in a deferred tax asset that we determined required a valuation allowance. Changes in the valuation allowances, when they are recognized in the provision for income taxes, are included as a component of the estimated annual effective tax rate. 
 
We have not provided for withholding and U.S. taxes for the unremitted earnings of certain non-U.S. subsidiaries because we have currently reinvested these earnings indefinitely in these foreign operations. At December 31, 2010, we had approximately $2,109.4 million in unremitted earnings outside the United States for which withholding and U.S. taxes were not provided. Income tax expense would be incurred if these funds were remitted to the United States. It is not practicable to estimate the amount of the deferred tax liability on such unremitted earnings. Upon remittance, certain foreign countries impose withholding taxes that are then available, subject to certain limitations, for use as credits against our U.S. tax liability, if any. We annually update our estimate of unremitted earnings outside the United States after the completion of each fiscal year.
 
Acquisitions
 
The accounting for acquisitions requires extensive use of estimates and judgments to measure the fair value of the identifiable tangible and intangible assets acquired, including in-process research and development, and liabilities assumed. Additionally, we must determine whether an acquired entity is considered to be a business or a set of net assets, because the excess of the purchase price over the fair value of net assets acquired can only be recognized as goodwill in a business combination.
 
On January 15, 2010, we acquired Serica Technologies, Inc., or Serica, for an aggregate purchase price of approximately $63.7 million, net of cash acquired. On July 1, 2010, we completed a business combination agreement and entered into a revised distribution agreement with our distributor in Turkey. We paid $33.0 million for the termination of the original distribution agreement and purchased the commercial assets related to the selling of our products in Turkey for $6.1 million in cash and estimated contingent consideration of $36.7 million as of the acquisition date. On June 17, 2011, we acquired Alacer Biomedical, Inc., or Alacer, for an aggregate purchase price of approximately $7.0 million, net of cash acquired. On July 1, 2011, we purchased the commercial assets related to the selling and distribution of our products from our distributor in South Africa for $8.6 million, net of a $2.2 million pre-existing third-party receivable from the distributor. On July 22, 2011, we acquired Vicept for $74.1 million in cash and estimated contingent consideration of $163.0 million as of the acquisition date. On August 8, 2011, we acquired Precision Light for $11.7 million in cash and estimated contingent consideration of $6.2 million. We accounted for these acquisitions as business combinations. The tangible and intangible assets acquired and liabilities assumed in connection with these acquisitions were recognized based on their estimated fair
 
29

values at the acquisition dates. The determination of estimated fair values requires significant estimates and assumptions including, but not limited to, determining the timing and estimated costs to complete the in-process projects, projecting regulatory approvals, estimating future cash flows and developing appropriate discount rates. We believe the estimated fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions.
 
Impairment Evaluations for Goodwill and Purchased Intangible Assets
 
We evaluate goodwill for impairment on an annual basis, or more frequently if we believe indicators of impairment exist, by comparing the carrying value of each of our reporting units to their estimated fair value. We have identified two reporting units, specialty pharmaceuticals and medical devices, and currently perform our annual evaluation as of October 1 each year.
 
We primarily use the income approach and the market approach to valuation that include the discounted cash flow method, the guideline company method, as well as other generally accepted valuation methodologies to determine the fair value of our reporting units. Upon completion of the October 2010 annual impairment assessment, we determined that no impairment was indicated as the estimated fair value of each of the two reporting units exceeded its respective carrying value. As of September 30, 2011, we do not believe any significant indicators of impairment exist for our goodwill that would require additional analysis.
 
We also review purchased intangible assets for impairment when events or changes in circumstances indicate that the carrying value of our intangible assets may not be recoverable. An impairment in the carrying value of an intangible asset is recognized whenever anticipated future undiscounted cash flows from an intangible asset are estimated to be less than its carrying value.
 
In March 2011, we decided to discontinue development of the EasyBand Remote Adjustable Gastric Band System, or EasyBand , a technology that we acquired in connection with our 2007 acquisition of EndoArt SA, or EndoArt. As a result, in the first quarter of 2011 we recorded a pre-tax impairment charge of $16.1 million for the intangible assets associated with the EasyBand technology.
 
In the third quarter of 2011, we recorded a pre-tax charge of $4.3 million related to the impairment of an in-process research and development asset associated with a tissue reinforcement technology that has not yet achieved regulatory approval acquired in connection with our 2010 acquisition of Serica. The impairment charge was recognized because current estimates of the anticipated future undiscounted cash flows of the asset were not sufficient to recover its carrying amount.
 
 Significant management judgment is required in the forecasts of future operating results that are used in our impairment evaluations. The estimates we have used are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans may change and estimates used may prove to be inaccurate. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur future impairment charges.
 
Operations
 
Headquartered in Irvine, California, we are a multi-specialty health care company focused on discovering, developing and commercializing innovative pharmaceuticals, biologics, medical devices and over-the-counter products that enable people to live life to its greatest potential — to see more clearly, move more freely and express themselves more fully. Our diversified approach enables us to follow our research and development into new specialty areas where unmet needs are significant.
 
We discover, develop and commercialize specialty pharmaceutical, biologics, medical devices and over-the-counter products for the ophthalmic, neurological, medical aesthetics, medical dermatology, breast aesthetics, obesity intervention, urological and other specialty markets in more than 100 countries around the world. We are a pioneer in specialty pharmaceutical research, targeting products and technologies related to specific disease areas such as chronic dry eye, glaucoma, retinal disease, psoriasis, acne, movement disorders, neuropathic pain and genitourinary diseases. Additionally, we are a leader in discovering, developing and marketing therapeutic and aesthetic biological, pharmaceutical and medical device products, including saline and silicone gel breast implants, dermal fillers and obesity intervention products. At September 30, 2011, we employed approximately 10,000 persons around the world. Our principal markets are the United States, Europe, Latin America and Asia Pacific.
 
Results of Operations
 
We operate our business on the basis of two reportable segments — specialty pharmaceuticals and medical devices. The specialty pharmaceuticals segment produces a broad range of pharmaceutical products, including: ophthalmic
 
30

products for dry eye, glaucoma, retinal diseases and external disease; Botox ® for certain therapeutic and aesthetic indications; skin care products for acne, psoriasis, eyelash growth and other prescription and over-the-counter skin care products; and urologics products. The medical devices segment produces a broad range of medical devices, including: breast implants for augmentation, revision and reconstructive surgery and tissue expanders; obesity intervention products, including the Lap-Band ® System and the Orbera Intragastric Balloon System; and facial aesthetics products. We provide global marketing strategy teams to coordinate the development and execution of a consistent marketing strategy for our products in all geographic regions that share similar distribution channels and customers.
 
Management evaluates our business segments and various global product portfolios on a revenue basis, which is presented below in accordance with GAAP. We also report sales performance using the non-GAAP financial measure of constant currency sales. Constant currency sales represent current period reported sales, adjusted for the translation effect of changes in average foreign exchange rates between the current period and the corresponding period in the prior year. We calculate the currency effect by comparing adjusted current period reported sales, calculated using the monthly average foreign exchange rates for the corresponding period in the prior year, to the actual current period reported sales. We routinely evaluate our net sales performance at constant currency so that sales results can be viewed without the impact of changing foreign currency exchange rates, thereby facilitating period-to-period comparisons of our sales. Generally, when the U.S. dollar either strengthens or weakens against other currencies, the growth at constant currency rates will be higher or lower, respectively, than growth reported at actual exchange rates.
 
The following table compares net sales by product line within each reportable segment and certain selected pharmaceutical products for the three and nine month periods ended September 30, 2011 and 2010:
 
   
Three months ended
             
   
September 30,
   
September 30,
   
Change in Product Net Sales
   
Percent Change in Product Net Sales
 
   
2011
   
2010
   
Total
   
Performance
   
Currency
   
Total
   
Performance
   
Currency
 
               
(in millions)
                               
Net Sales by Product Line:
                                               
Specialty Pharmaceuticals:
                                               
Eye Care Pharmaceuticals
  $ 611.6     $ 568.8     $ 42.8     $ 27.1     $ 15.7       7.5 %     4.8 %     2.7 %
Botox ® /Neuromodulator
    396.7       341.7       55.0       44.7       10.3       16.1 %     13.1 %     3.0 %
Skin Care
    66.4       61.4       5.0       4.8       0.2       8.1 %     7.8 %     0.3 %
Urologics
    15.0       17.4       (2.4 )     (2.4 )           (13.8 )%     (13.8 )%     %
Total Specialty Pharmaceuticals
    1,089.7       989.3       100.4       74.2       26.2       10.1 %     7.5 %     2.6 %
Medical Devices:
                                                               
Breast Aesthetics
    83.3       74.9       8.4       5.6       2.8       11.2 %     7.5 %     3.7 %
Obesity Intervention
    49.7       59.3       (9.6 )     (11.0 )     1.4       (16.2 )%     (18.5 )%     2.3 %
Facial Aesthetics
    88.4       68.5       19.9       16.8       3.1       29.1 %     24.5 %     4.6 %
Total Medical Devices
    221.4       202.7       18.7       11.4       7.3       9.2 %     5.6 %     3.6 %
                                                                 
Total product net sales
  $ 1,311.1     $ 1,192.0     $ 119.1     $ 85.6     $ 33.5       10.0 %     7.2 %     2.8 %
                                                                 
Domestic product net sales
    59.3 %     62.6 %                                                
International product net sales
    40.7 %     37.4 %                                                
                                                                 
Selected Product Net Sales (a):
                                                               
Alphagan ®  P Alphagan ®
    and  Combigan ®
  $ 100.5     $ 99.8     $ 0.7     $ (1.8 )   $ 2.5       0.7 %     (1.8 )%     2.5 %
Lumigan ® Franchise
    147.0       134.4       12.6       7.0       5.6       9.3 %     5.2 %     4.1 %
Restasis ®
    166.1       158.9       7.2       7.7       (0.5 )     4.5 %     4.8 %     (0.3 )%
Sanctura ® Franchise
    15.0       17.4       (2.4 )     (2.4 )           (13.8 )%     (13.8 )%     %
Latisse ®
    21.8       21.7       0.1       (0.1 )     0.2       0.4 %     (0.4 )%     0.8 %

   
Nine months ended
             
   
September 30,
   
September 30,
   
Change in Product Net Sales
   
Percent Change in Product Net Sales
 
   
2011
   
2010
   
Total
   
Performance
   
Currency
   
Total
   
Performance
   
Currency
 
               
(in millions)
                               
Net Sales by Product Line:
                                               
Specialty Pharmaceuticals:
                                               
Eye Care Pharmaceuticals
  $ 1,861.1     $ 1,658.6     $ 202.5     $ 158.3     $ 44.2       12.2 %     9.5 %     2.7 %
Botox ® /Neuromodulator
    1,179.6       1,033.2       146.4       116.0       30.4       14.2 %     11.2 %     3.0 %
Skin Care
    190.4       171.3       19.1       18.5       0.6       11.2 %     10.8 %     0.4 %
Urologics
    42.3       46.7       (4.4 )     (4.4 )           (9.4 )%     (9.4 )%     %
Total Specialty Pharmaceuticals
    3,273.4       2,909.8       363.6       288.4       75.2       12.5 %     9.9 %     2.6 %
Medical Devices:
                                                               
Breast Aesthetics
    262.9       234.4       28.5       20.8       7.7       12.2 %     8.9 %     3.3 %
Obesity Intervention
    156.2       182.4       (26.2 )     (30.3 )     4.1       (14.4 )%     (16.6 )%     2.2 %
Facial Aesthetics
    271.8       202.9       68.9       59.7       9.2       34.0 %     29.4 %     4.6 %
Total Medical Devices
    690.9       619.7       71.2       50.2       21.0       11.5 %     8.1 %     3.4 %
                                                                 
Total product net sales
  $ 3,964.3     $ 3,529.5     $ 434.8     $ 338.6     $ 96.2       12.3 %     9.6 %     2.7 %
                                                                 
Domestic product net sales
    59.6 %     62.9 %                                                
International product net sales
    40.4 %     37.1 %                                                
                                                                 
Selected Product Net Sales (a):
                                                               
Alphagan ®  P Alphagan ®
    and  Combigan ®
  $ 309.2     $ 298.2     $ 11.0     $ 4.3     $ 6.7       3.7 %     1.4 %     2.3 %
Lumigan ® Franchise
    452.9       384.9       68.0       53.4       14.6       17.7 %     13.9 %     3.8 %
Restasis ®
    501.1       445.6       55.5       55.5             12.5 %     12.5 %     %
Sanctura ® Franchise
    42.3       46.7       (4.4 )     (4.4 )           (9.4 )%     (9.4 )%     %
Latisse ®
    69.0       64.4       4.6       4.1       0.5       7.1 %     6.3 %     0.8 %
                                                                 
(a) Percentage change in selected product net sales is calculated on amounts reported to the nearest whole dollar.
 
Product Net Sales
 
Product net sales increased by $119.1 million in the third quarter of 2011 compared to the third quarter of 2010 due to an increase of $100.4 million in our specialty pharmaceuticals product net sales and an increase of $18.7 million in our medical devices product net sales. The increase in specialty pharmaceuticals product net sales is due to increases in product net sales of our eye care pharmaceuticals, Botox ® and skin care product lines, partially offset by a small decrease in product net sales of our urologics product line. The increase in medical devices product net sales reflects an increase in product net sales of our breast aesthetics and facial aesthetics product lines, partially offset by a decrease in product net sales of our obesity intervention product line.
 
Several of our products, including Botox ® Cosmetic, Latisse ® , over-the-counter artificial tears and our facial aesthetics and breast implant products, are purchased based on consumer choice and have limited reimbursement or are not reimbursable by government or other health care plans and are, therefore, partially or wholly paid for directly by the consumer. As such, the general economic environment and level of consumer spending have a significant effect on our sales of these products.
 
In March 2010, the U.S. government enacted the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively, the PPACA, reforming the U.S. health care system. The PPACA includes provisions that have a significant negative impact on our product net sales, including an extension of Medicaid and Medicare benefits to new patient populations, an increase in Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and a future increase in the initial coverage limit for Medicare participants. In the third quarter and first nine months of 2011, the additional rebates related to the PPACA had a negative impact of approximately $11.3 million and $34.2 million, respectively, on our product net sales compared to a negative impact of $3.6 million and $8.1 million, respectively, in the third quarter and first nine months of 2010. Based on internal information and assumptions, we currently estimate that the PPACA will have a negative impact on our fiscal year 2011 product net sales of approximately $45.0 million. The PPACA also established an annual non-deductible fee on entities that sell branded prescription drugs or biologics to specified government programs in the United States. We expect this fee will have a negative impact on our selling, general and administrative expenses of approximately $23.2 million in 2011. In addition, we expect incremental price reductions and rebate increases mandated by European governments to have a negative impact on our 2011 product net sales of approximately $40.0 million. In the aggregate, we expect that incremental costs of healthcare reform under the PPACA and the effect of European pricing pressures will have a negative impact on our fiscal year 2011 earnings on a pre-tax equivalent basis of approximately $120 million.
 
Eye care pharmaceuticals product net sales increased in the third quarter of 2011 compared to the third quarter of 2010 primarily due to an increase in sales of Ozurdex ® , our biodegradable, sustained-release steroid implant for the treatment of certain retinal diseases, an increase in net sales of Restasis ® , our therapeutic treatment for chronic dry eye disease, an increase in new product sales of our glaucoma drug Lumigan ® 0.01%, which was launched in the United States in the fourth quarter of 2010, an increase in sales of Ganfort , our Lumigan ® and timolol combination for the treatment of glaucoma, an increase in sales of Combigan ® , our Alphagan ®  and timolol combination for the treatment of glaucoma, an increase in sales of Zymaxid ® , our next-generation anti-infective product in the fluoroquinolone category indicated for the treatment of bacterial conjunctivitis, an increase in new product sales of Lastacaft , our topical allergy medication for the treatment and prevention of itching associated with allergic conjunctivitis, which we launched in the United States in January 2011, and an increase in sales of our artificial tears products Refresh ® and Refresh ® Optive , partially offset by decreases in sales of our glaucoma drugs Alphagan ® , Alphagan ® P 0.15% and Lumigan ® 0.03%, our older-generation fluoroquinolone Zymar ® , and our older generation topical allergy medication Elestat ® . Beginning in February 2011 we discontinued the U.S. sales of Zymar ® .
 
In May 2011, a generic version of Elestat ® was launched in the United States. While we estimate that our product net sales will be negatively impacted in 2011 due to sales of generic formulations of this product, we expect that any such negative impact on product net sales will be partially offset by increased sales of Lastacaft . In addition, a generic version of Zymar ® may be launched in the United States in the near future. In June 2011, the U.S. patent for Tazorac ® , indicated for psoriasis and acne, expired. The U.S. Food and Drug Administration, or FDA, has posted guidance regarding requirements for clinical bioequivalence for a generic of tazarotene, separately for both psoriasis and acne. Our interpretation is that this will require generic manufacturers to conduct a trial, at risk, for both indications.
 
We increased prices on certain eye care pharmaceutical products in the United States in the fourth quarter of 2010 and the first nine months of 2011. Effective January 8, 2011, we increased the published U.S. list price for Restasis ® , Alphagan ® P 0.1%, Alphagan ® P 0.15%, Combigan ® , Zymar ® , Zymaxid ® , Acular ® , Acular LS ® and Acuvail ® by four percent and Lumigan ® 0.1% and Lumigan ® 0.3% by eight percent. Effective July 9, 2011, we increased the published U.S. list price for Alphagan ® P 0.1% and Combigan ® by an additional four percent, Alphagan ® P 0.15% by an additional eight percent, Acular ® and Acular LS ® by an additional five percent, Zymaxid ® and Acuvail ® by an additional fourteen percent and Lastacaft by eight
 
33

percent. Effective September 10, 2011, we increased the published U.S. list price for Lumigan ® 0.1% and Lumigan ® 0.3% by an additional six percent. These price increases had a positive net effect on our U.S. sales in the third quarter of 2011 compared to the third quarter of 2010, but the actual net effect is difficult to determine due to the various managed care sales rebate and other incentive programs in which we participate. Wholesaler buying patterns and the change in dollar value of the prescription product mix also affected our reported net sales dollars, although we are unable to determine the impact of these effects.
 
Total sales of Botox ® increased in the third quarter of 2011 compared to the third quarter of 2010 due to strong growth in sales for therapeutic use in all of our principal geographic markets and an increase in sales for cosmetic use in the United States, Canada, Latin America and Asia Pacific, partially offset by a small decline in Europe due to launches of competitive products in new geographical markets. Sales of Botox ® for therapeutic use in the United States benefited from sales for the prophylactic treatment of headaches in adults with chronic migraine and upper limb spasticity, indications which were approved by the FDA in 2010. We believe our worldwide market share for neuromodulators, including Botox ® , was approximately 77% in the second quarter of 2011, the last quarter for which market data is available.
 
Skin care product net sales increased in the third quarter of 2011 compared to the third quarter of 2010 primarily due to an increase in sales of Aczone ® , our topical dapsone treatment for acne vulgaris. Effective January 8, 2011, we increased the published U.S. list price for Aczone ® by approximately four percent, and Tazorac ® and Avage ® by approximately fifteen percent. Effective June 11, 2011, we increased the published U.S. list price for Aczone ® by approximately an additional five percent, and Tazorac ® and Avage ® by approximately an additional ten percent.  
 
Urologics sales, which are presently concentrated in the United States and consist of our Sanctura ® franchise products for the treatment of overactive bladder, or OAB, decreased in the third quarter of 2011 compared to the third quarter of 2010, primarily due to lower sales of Sanctura ® , our twice-a-day anticholinergic for the treatment of OAB, which was negatively impacted by the launch of trospium chloride generics in September 2010, and a small decrease in sales of Sanctura XR ® , our second generation, once-daily anticholinergic for the treatment of OAB, which was negatively impacted by an increase in sales rebates and allowances. Effective January 8, 2011, we increased the published U.S. list price for Sanctura XR ® by eight percent and Sanctura ® by ten percent. In addition, effective June 11, 2011, we increased the published U.S. list price for Sanctura XR ® by an additional seven percent.
 
We have a policy to attempt to maintain average U.S. wholesaler inventory levels of our specialty pharmaceutical products at an amount less than eight weeks of our net sales. At September 30, 2011, based on available external and internal information, we believe the amount of average U.S. wholesaler inventories of our specialty pharmaceutical products was near the lower end of our stated policy levels.
 
Breast aesthetics product net sales, which consist primarily of sales of silicone gel and saline breast implants and tissue expanders, increased in the third quarter of 2011 compared to the third quarter of 2010 due to increases in sales in Europe, Latin America and Asia Pacific, partially offset by a small decline in the United States. The increase in sales of breast aesthetics products in international markets was primarily due to higher silicone gel implant volume. The small decline in sales of breast aesthetic products in the United States was primarily due to lower saline implant unit volume and higher accruals for customer rebate programs, partially offset by higher silicone gel implant and tissue expander unit volume.
 
Obesity intervention product net sales, which consist primarily of sales of devices used for minimally invasive long-term treatments of obesity such as our Lap-Band ® and Lap-Band AP ® Systems and Orbera System, decreased in the third quarter of 2011 compared to the third quarter of 2010 primarily due to a decrease in sales in the United States, Canada, Spain and Australia, partially offset by an increase in sales in Latin America. We believe sales of obesity intervention products in the United States and other principal geographic markets continued to be negatively impacted by general economic conditions given the substantial patient co-pays associated with these products, government spending restrictions and access restrictions imposed by insurance plans. In addition, net sales of our obesity intervention products continued to be negatively impacted by a general increase in the U.S. market share of other competitive surgical obesity procedures.
 
Facial aesthetics product net sales, which consist primarily of sales of hyaluronic acid-based dermal fillers used to correct facial wrinkles, increased in the third quarter of 2011 compared to the third quarter of 2010 primarily due to a significant increase in sales in the United States and all of our other principal geographic markets. We believe the increase in sales of facial aesthetic products was primarily due to an increase in sales of Juvéderm ® XC with lidocaine in the United States, recent launches of Juvéderm ® with lidocaine and Juvéderm ® Voluma in many of our international markets and a global expansion of the dermal filler market, partially offset by a decline in sales of older generation collagen-based dermal fillers, which we discontinued selling in early 2011.
 
Foreign currency changes increased product net sales by $33.5 million in the third quarter of 2011 compared to the third quarter of 2010, primarily due to the strengthening of the euro, Brazilian real, Australian dollar, Canadian dollar and
 
34

U.K. pound compared to the U.S. dollar.
 
U.S. product net sales as a percentage of total product net sales decreased by 3.3 percentage points to 59.3% in the third quarter of 2011 compared to U.S. sales of 62.6% in the third quarter of 2010, due primarily to higher sales growth in our international markets compared to the U.S. market for our eye care pharmaceuticals and breast aesthetics product lines, and a greater percentage decline in sales in the U.S. market compared to our total international markets for our obesity intervention product line. Additionally, international sales benefited from a positive translation impact due to a general strengthening of foreign currencies compared to the U.S. dollar in markets where we sold products in the third quarter of 2011 compared to the third quarter of 2010.
 
The $434.8 million increase in product net sales in the first nine months of 2011 compared to the first nine months of 2010 was the combined result of an increase of $363.6 million in our specialty pharmaceuticals product net sales and an increase of $71.2 million in our medical devices product net sales. 
 
The increase in specialty pharmaceutical product net sales in the first nine months of 2011 compared to the first nine months of 2010 was primarily due to the same factors discussed above with respect to the increase in specialty pharmaceuticals product net sales for the third quarter of 2011. In addition, net sales of Latisse ® , our treatment for inadequate or insufficient eyelashes, Sanctura XR ® , our once-daily anticholinergic for the treatment of OAB, and our glaucoma drug Alphagan ® P 0.1% increased in the first nine months of 2011 compared to the first nine months of 2010, and net sales of Botox ® for cosmetic use in Europe increased in the first nine months of 2011 compared to the first nine months of 2010. Net sales of our topical acne drug Tazorac ® decreased in the first nine months of 2011 compared to the first nine months of 2010 due to a reduction in promotional activity.
 
The increase in medical devices product net sales in the first nine months of 2011 compared to the first nine months of 2010 was primarily due to the same factors discussed above with respect to the increase in medical devices product net sales for the third quarter of 2011. In addition, net sales of breast aesthetics products in the United States increased in the first nine months of 2011 compared to the first nine months of 2010.
 
Foreign currency changes increased product net sales by $96.2 million in the first nine months of 2011 compared to the first nine months of 2010, primarily due to the strengthening of the euro, Brazilian real, Australian dollar, Canadian dollar and U.K. pound compared to the U.S. dollar.
 
U.S. sales as a percentage of total product net sales decreased by 3.3 percentage points to 59.6% in the first nine months of 2011 compared to U.S. sales of 62.9% in the first nine months of 2010, due primarily to the same factors described above with respect to the decrease in U.S. sales as a percentage of total product net sales in the third quarter of 2011. Additionally, the decrease in U.S. sales as a percentage of total product net sales in the first nine months of 2011 compared to the first nine months of 2010 was partially offset by an increase in sales of skin care products, which are highly concentrated in the United States. 
 
Other Revenues
 
Other revenues increased $1.1 million to $17.3 million in the third quarter of 2011 compared to $16.2 million in the third quarter of 2010. The increase in other revenues is primarily due to an increase in royalty income from sales of brimonidine products by Alcon, Inc. in the United States under a licensing agreement, an increase in royalty income from sales of Lumigan ® by Senju Pharmaceutical Co., Ltd., or Senju, in Japan under a licensing agreement and an increase in royalty income from sales of Botox ® for therapeutic use in Japan and China by GlaxoSmithKline, or GSK, under a licensing agreement, partially offset by a decrease in reimbursement income, primarily related to a strategic support agreement with GSK.
 
Other revenues decreased $28.1 million to $52.5 million in the first nine months of 2011 compared to $80.6 million in the first nine months of 2010, primarily due to the prior year impact of an upfront net licensing fee of $36.0 million that we recognized in the first quarter of 2010 related to an agreement with Bristol-Myers Squibb Company for the exclusive worldwide rights to develop, manufacture and commercialize an investigational medicine for neuropathic pain and a reduction in reimbursement income, primarily related to a strategic support agreement with GSK. These reductions were partially offset by an increase in royalty income in the first nine months of 2011 compared to the first nine months of 2010 from sales of brimonidine products by Alcon, Inc. in the United States under a licensing agreement, an increase in royalty income from sales of Lumigan ® by Senju in Japan under a licensing agreement and an increase in royalty income from sales of Botox ® for therapeutic use in Japan and China by GSK under a licensing agreement.
Cost of Sales
 
Cost of sales increased $10.4 million, or 5.9%, in the third quarter of 2011 to $188.1 million, or 14.3% of product net sales, compared to $177.7 million, or 14.9% of product net sales in the third quarter of 2010. This increase in cost of sales primarily resulted from the 10.0% increase in total product net sales, partially offset by a decrease in cost of sales as a percentage of product net sales primarily due to lower royalty expenses and positive changes in product mix.
 
Cost of sales increased $27.5 million, or 5.1%, in the first nine months of 2011 to $566.7 million, or 14.3% of product net sales, compared to $539.2 million, or 15.3% of product net sales in the first nine months of 2010. This increase in cost of sales primarily resulted from the 12.3% increase in total product net sales, partially offset by a decrease in cost of sales as a percentage of product net sales primarily due to the same factors described above with respect to the decrease in cost of sales as a percentage of product net sales for the third quarter of 2011.
 
Selling, General and Administrative
 
Selling, general and administrative, or SG&A, expenses increased $21.2 million, or 4.1%, to $538.5 million, or 41.1% of product net sales, in the third quarter of 2011 compared to $517.3 million, or 43.4% of product net sales, in the third quarter of 2010. SG&A expenses in the third quarter of 2011 include $0.8 million of stockholder derivative litigation costs associated with the 2010 global settlement with the U.S. Department of Justice, or DOJ, regarding our past U.S. sales and marketing practices relating to certain therapeutic uses of Botox ® and a $20.0 million milestone payment to MAP Pharmaceuticals, Inc., or MAP, for the achievement of a regulatory milestone in connection with our collaboration and co-promotion agreement for Levadex ® , a self-administered, orally inhaled therapy for the acute treatment of migraine in adults that has not yet achieved regulatory approval. SG&A expenses in the third quarter of 2010 include $3.0 million of costs associated with the DOJ investigation described above, a charge of $33.0 million related to the termination of a distributor agreement in Turkey and a $10.6 million charge for the write-off of manufacturing assets related to the abandonment of an eye care product. Excluding the effect of the items described above, SG&A expenses increased $47.0 million, or 10.0%, to $517.7 million, or 39.5% of product net sales, in the third quarter of 2011 compared to $470.7 million, or 39.5% of product net sales in the third quarter of 2010. The increase in SG&A expenses in dollars, excluding the charges described above, primarily relates to increases in selling, marketing, promotion and general and administrative expenses and the negative translation impact due to a general strengthening of foreign currencies compared to the U.S. dollar. The increase in selling and marketing expenses in the third quarter of 2011 compared to the third quarter of 2010 principally relates to increased personnel and related incentive compensation costs that support the 10.0% increase in product net sales, and additional costs supporting the expansion of our sales forces, including the addition of several new direct operations in emerging markets. The increase in promotion expenses is primarily due to increased professional promotion activity, partially offset by a small decline in direct-to-consumer advertising, primarily related to Latisse ® . The increase in general and administrative expenses is primarily due to the negative impact of the fee established by the PPACA for selling branded pharmaceuticals to certain U.S. government programs, increased compliance costs associated with the Corporate Integrity Agreement entered into in 2010 with the Office of Inspector General of the U.S. Department of Health and Human Services, an increase in legal costs, an increase in incentive compensation costs and an increase in regional management costs related to the expansion of our direct selling operations in emerging markets, partially offset by an insurance recovery related to damaged inventory.
 
SG&A expenses increased $204.6 million, or 13.7%, to $1,694.7 million, or 42.7% of product net sales in the first nine months of 2011 compared to $1,490.1 million, or 42.2% of product net sales in the first nine months of 2010. SG&A expenses in the first nine months of 2011 include an upfront payment of $60.0 million and a regulatory milestone payment of $20.0 million related to the Levadex ® collaboration and co-promotion agreement with MAP, a gain of $9.4 million from the substantially complete liquidation of a foreign subsidiary and fixed asset impairment charges of $2.2 million related to the discontinued development of EasyBand , $3.1 million of stockholder derivative litigation costs associated with the 2010 global settlement with the DOJ regarding our past U.S. sales and marketing practices relating to certain therapeutic uses of Botox ® and a $2.3 million charge related to the change in fair value of a contingent consideration liability associated with our purchase of a distributor’s business in Turkey. SG&A expenses in the first nine months of 2010 include $11.5 million of costs associated with the DOJ investigation described above, a charge of $33.0 million related to the termination of a distributor agreement in Turkey and a $10.6 million charge for the write-off of manufacturing assets related to the abandonment of an eye care product. Excluding the effect of the items described above, SG&A expenses increased $181.5 million, or 12.6%, to $1,616.5 million, or 40.8% of product net sales, in the first nine months of 2011 compared to $1,435.0 million, or 40.7% of product net sales in the first nine months of 2010. The increase in SG&A expenses in dollars, excluding the charges described above, is primarily due to the same factors described above with respect to the increase in SG&A expenses for the third quarter of 2011. Additionally, the increase in general and administrative expenses in the first nine months of 2011 compared to the first nine months of 2010 was also due to an increase in losses from the disposal of fixed assets.
Research and Development
 
Research and development, or R&D, expenses increased $27.3 million, or 14.1%, to $221.3 million in the third quarter of 2011, or 16.9% of product net sales, compared to $194.0 million, or 16.3% of product net sales in the third quarter of 2010. The increase in R&D expenses was primarily due to increased spending on next generation eye care pharmaceuticals products for the treatment of glaucoma and retinal diseases, potential new treatment applications for Latisse ® , new technology discovery programs, hyaluronic-acid based dermal filler products, tissue reinforcement technology acquired in the Serica acquisition, an increase in costs associated with our collaboration with Serenity Pharmaceuticals, LLC, or Serenity, related to the development of technology for the treatment of nocturia, a urological disorder characterized by frequent urination at nighttime, an increase in costs associated with our collaboration with Spectrum Pharmaceuticals, Inc., or Spectrum, related to the development of apaziquone for the treatment of non-muscle invasive bladder cancer, and an increase in costs related to Botox ® for the treatment of idiopathic overactive bladder, partially offset by a reduction in expenses related to Botox ® for the treatment of urinary incontinence in adults with neurological conditions and a reduction in expenses related to the development of Ozurdex ® .
 
R&D expenses increased $72.1 million, or 11.9%, to $676.4 million in the first nine months of 2011, or 17.1% of product net sales, compared to $604.3 million, or 17.1% of product net sales in the first nine months of 2010. R&D expenses in the first nine months of 2011 included a charge of $45.0 million for an upfront payment for the in-licensing of technology for the treatment of retinal diseases from Molecular Partners AG that has not yet achieved regulatory approval. R&D expenses in the first nine months of 2010 included a charge of $43.0 million for an upfront payment for the in-licensing of technology for the treatment of nocturia from Serenity that has not yet achieved regulatory approval. Excluding the effect of these charges, R&D expenses increased by $70.1 million, or 12.5% in the first nine months of 2011 compared to the first nine months of 2010. The increase in R&D expenses, excluding the upfront payments to Molecular Partners AG and Serenity, was primarily due to the same factors described above with respect to the increase in R&D expenses in the third quarter of 2011 compared to the third quarter of 2010.
 
Amortization of Acquired Intangible Assets
 
Amortization of acquired intangible assets increased $0.8 million to $31.9 million in the third quarter of 2011, or 2.4% of product net sales, compared to $31.1 million, or 2.6% of product net sales, in the third quarter of 2010. The increase in amortization expense is primarily due to an increase in the balance of intangible assets subject to amortization, including a capitalized upfront licensing payment in September 2010 for Lastacaft and other intangible assets that we acquired in connection with our July 2011 purchase of our distributor’s business related to our products in South Africa and our August 2011 acquisition of Precision Light, partially offset by a decrease in the balance of intangible assets subject to amortization, including the   intangible assets associated with the EasyBand technology, which were impaired in the first quarter of 2011 and trademarks acquired in connection with our 2006 acquisition of Inamed Corporation, which became fully amortized at the end of the first quarter of 2011.
 
Amortization of acquired intangible assets decreased $9.9 million to $95.6 million in the first nine months of 2011, or 2.4% of product net sales, compared to $105.5 million, or 3.0% of product net sales, in the first nine months of 2010. The decrease in amortization expense is primarily due to the impairment of the Sanctura ® intangible assets in the third quarter of 2010, the impairment of the   intangible assets associated with the EasyBand technology in the first quarter of 2011 and a decline in amortization expense associated with trademarks acquired in connection with our 2006 acquisition of Inamed Corporation, which became fully amortized at the end of the first quarter of 2011, partially offset by an increase in the balance of intangible assets subject to amortization, including a capitalized upfront licensing payment in September 2010 for Lastacaft and other intangible assets that we acquired in connection with our July 2010 purchase of our distributor’s business related to our products in Turkey, our July 2011 purchase of our distributor’s business related to our products in South Africa and our August 2011 acquisition of Precision Light.
 
Legal Settlement
 
In the third quarter of 2010, we recorded total pre-tax charges of $609.9 million in connection with the global settlement with the DOJ regarding our past U.S. sales and marketing practices relating to certain therapeutic uses of Botox ® . This amount includes a criminal fine of $350.0 million related to a single misdemeanor “misbranding” charge, $25.0 million in forfeited assets, a civil settlement of $225.0 million to resolve civil claims asserted by the DOJ, and estimated interest and certain attorneys’ fees that we were obligated to pay in connection with the global settlement, but excludes our ongoing administrative legal fees and other costs. The “misbranding” charge is known as a strict liability offense, and does not involve false or deceptive conduct.
Impairment of Intangible Assets and Related Costs
 
In the third quarter of 2011, we recorded a pre-tax charge of $4.3 million related to the impairment of an in-process research and development asset associated with a tissue reinforcement technology that has not yet achieved regulatory approval acquired in connection with our 2010 acquisition of Serica. The impairment charge was recognized because current estimates of the anticipated future undiscounted cash flows of the asset were not sufficient to recover its carrying amount.
 
In March 2011, we decided to discontinue development of EasyBand , a technology that we acquired in connection with our 2007 acquisition of EndoArt. As a result, in the first quarter of 2011 we recorded a pre-tax impairment charge of $16.1 million for the intangible assets associated with the EasyBand technology.
 
In the third quarter of 2010, we concluded that the intangible assets and a related prepaid royalty asset associated with the Sanctura ® franchise, which we acquired in connection with our 2007 acquisition of Esprit Pharma Holding Company, Inc. and certain subsequent licensing and commercialization transactions, had become impaired. As a result, in the third quarter of 2010, we recorded an aggregate charge of $369.1 million related to the impairment of the Sanctura ® assets and related costs, which includes charges for impairing the intangible assets and a related prepaid royalty asset and estimated costs associated with the termination of a third-party agreement primarily related to the promotion of Sanctura XR ® to general practitioners in the United States. In the second quarter of 2011, we recorded additional costs of $3.3 million for the termination of the third-party agreement.
 
Restructuring Charges
 
Restructuring charges (reversal) were $(0.1) million and $0.1 million in the third quarter of 2011 and 2010, respectively, and $4.6 million and $0.8 million in the first nine months of 2011 and 2010, respectively.
 
Discontinued Development of EasyBand
 
In March 2011, we decided to discontinue development of the EasyBand Remote Adjustable Gastric Band System and close the related research and development facility in Switzerland.
 
As a result of discontinuing the development of EasyBand and the closure of the related research and development facility, in the first quarter of 2011 we recorded a pre-tax impairment charge of $16.1 million for the intangible assets associated with the EasyBand technology , fixed asset impairment charges of $2.3 million and a gain of $9.4 million from the substantially complete liquidation of our investment in a foreign subsidiary. In addition, we recorded $4.6 million of restructuring charges, consisting of $3.0 million of employee severance and other one-time termination benefits for approximately 30 people affected by the facility closure, $1.5 million of contract termination costs and $0.1 million of other related costs. In the second quarter of 2011, we recorded an additional $0.1 million of restructuring charges primarily related to contract termination costs and a reversal of fixed asset impairment charges of $0.1 million.
 
Other Restructuring Activities and Integration Costs
 
Included in the three and nine month periods ended September 30, 2011 are a $0.1 million restructuring charge reversal primarily for employee severance related to our acquisition of Serica.
 
Included in the three and nine month periods ended September 30, 2010 are $0.1 million and $0.2 million, respectively, of restructuring charges for an abandoned leased facility related to our fiscal year 2005 restructuring and streamlining of our European operations. Included in the nine month period ended September 30, 2010 are $0.8 million of restructuring charges primarily for employee severance related to our acquisition of Serica, $0.1 million of restructuring charges primarily for employee severance and other one-time termination benefits related to our fiscal year 2009 restructuring plan and a $0.3 million restructuring charge reversal primarily for employee severance, one-time termination benefits and contract termination costs related to our breast implant manufacturing facility in Arklow, Ireland.
 
Included in the three and nine month periods ended September 30, 2011 are $0.6 million and $2.2 million, respectively, of SG&A expenses related to transaction and integration costs associated with the purchase of various businesses and licensing, collaboration and co-promotion agreements. Included in the three month period ended September 30, 2010 are $0.3 million of SG&A expenses and $0.1 million of R&D expenses related to transaction and integration costs associated with the purchase of various businesses . Included in the nine month period ended September 30, 2010 are $1.8 million of SG&A expenses and $0.1 million of R&D expenses related to transaction and integration costs associated with the purchase of various businesses and a license, development and commercialization agreement .
Operating Income (Loss)
 
Management evaluates business segment performance on an operating income basis exclusive of general and administrative expenses and other indirect costs, legal settlement expenses, impairment of intangible assets and related costs, restructuring charges, in-process research and development expenses, amortization of certain identifiable intangible assets related to business combinations and asset acquisitions and related capitalized licensing costs and certain other adjustments, which are not allocated to our business segments for performance assessment by our chief operating decision maker. Other adjustments excluded from our business segments for purposes of performance assessment represent income or expenses that do not reflect, according to established Company-defined criteria, operating income or expenses associated with our core business activities.
 
For the third quarter of 2011, general and administrative expenses, other indirect costs and other adjustments not allocated to our business segments for purposes of performance assessment consisted of general and administrative expenses of $102.0 million, a milestone payment of $20.0 million paid to MAP for the FDA acceptance of a New Drug Application, or NDA, filing for technology that has not achieved regulatory approval, stockholder derivative litigation costs of $0.8 million in connection with the global settlement with the DOJ regarding our past U.S. sales and marketing practices relating to Botox ® , a purchase accounting fair market value inventory adjustment of $0.4 million and transaction costs of $0.1 million associated with the purchase of our distributor’s business related to our products in South Africa, transaction costs of $0.5 million associated with the purchase of various businesses and other net indirect costs of $3.9 million. 
 
For the third quarter of 2010, general and administrative expenses, other indirect costs and other adjustments not allocated to our business segments for purposes of performance assessment consisted of general and administrative expenses of $81.1 million, costs associated with the DOJ investigation regarding our past U.S. sales and marketing practices relating to Botox ® of $3.0 million, a distributor termination fee of $33.0 million and transaction, integration and transition costs of $0.4 million associated with the purchase of our distributor’s business related to our products in Turkey, the write-off of manufacturing assets related to the abandonment of an eye care product of $10.6 million and other net indirect costs of $3.3 million.
 
For the first nine months of 2011, general and administrative expenses, other indirect costs and other adjustments not allocated to our business segments for purposes of performance assessment consisted of general and administrative expenses of $292.1 million, an upfront payment of $60.0 million and subsequent milestone payment of $20.0 million paid to MAP for the FDA acceptance of an NDA filing for technology that has not achieved regulatory approval and related transaction costs of $0.6 million, an upfront licensing fee of $45.0 million to Molecular Partners AG for technology that has not achieved regulatory approval and related transaction costs of $0.1 million, fixed asset impairment charges of $2.2 million, a gain of $9.4 million from the substantially complete liquidation of the Company’s investment in a foreign subsidiary, stockholder derivative litigation costs of $3.1 million in connection with the global settlement with the DOJ regarding our past U.S. sales and marketing practices relating to Botox ® , a charge of $2.3 million for the change in fair value of a contingent consideration liability, a purchase accounting fair market value inventory adjustment of $0.4 million and transaction costs of $0.7 million associated with the purchase of our distributor’s business related to our products in South Africa, integration and transaction costs of $0.8 million associated with the purchase of various businesses and other net indirect costs of $21.3 million. 
 
For the first nine months of 2010, general and administrative expenses, other indirect costs and other adjustments not allocated to our business segments for purposes of performance assessment consisted of licensing fee income of $36.0 million for a development and commercialization agreement with Bristol-Myers Squibb Company, general and administrative expenses of $247.2 million, costs associated with the DOJ investigation regarding our past U.S. sales and marketing practices relating to Botox ® of $11.5 million, an upfront licensing fee included in R&D expenses of $43.0 million paid to Serenity for technology that has not achieved regulatory approval and related transaction costs of $0.4 million, a distributor termination fee of $33.0 million and transaction, integration and transition costs of $1.0 million associated with the purchase of our distributor’s business related to our products in Turkey, the write-off of manufacturing assets related to the abandonment of an eye care product of $10.6 million, integration and transaction costs of $0.5 million related to our acquisition of Serica and other net indirect costs of $7.0 million.
 
The following table presents operating income for each reportable segment for the three and nine month periods ended September 30, 2011 and 2010 and a reconciliation of our segments’ operating income to consolidated operating income (loss):
 
   
Three months ended
   
Nine months ended
 
   
September 30,
2011
   
September 30,
2010
   
September 30,
2011
   
September 30,
2010
 
   
(in millions)
   
(in millions)
 
Operating income (loss):
                       
Specialty pharmaceuticals
  $ 433.5     $ 377.5     $ 1,286.3     $ 1,076.0  
Medical devices
    68.8       67.2       214.2       201.1  
Total segments
    502.3       444.7       1,500.5       1,277.1  
General and administrative expenses, other indirect costs and other adjustments
    127.7       131.4       439.2       318.2  
Amortization of acquired intangible assets (a)
    26.0       25.2       77.9       87.9  
Legal settlement
          609.9             609.9  
Impairment of intangible assets and related costs
    4.3       369.1       23.7       369.1  
Restructuring charges (reversal)
    (0.1 )     0.1       4.6       0.8  
Total operating income (loss)
  $ 344.4     $ (691.0 )   $ 955.1     $ (108.8 )
                                     
(a) Represents amortization of certain identifiable intangible assets related to business combinations and asset acquisitions and related capitalized licensing costs, as applicable.
 
Our consolidated operating income in the third quarter of 2011 was $344.4 million, or 26.3% of product net sales, compared to a consolidated operating loss of $691.0 million, or (58.0)% of product net sales in the third quarter of 2010. The $1,035.4 million increase in consolidated operating income was due to $609.9 million of legal settlement costs in the third quarter of 2010 that did not recur in the third quarter of 2011, a $119.1 million increase in product net sales, a $1.1 million increase in other revenues, a $0.2 million decrease in restructuring charges and a $364.8 million decrease in impairment of intangible assets and related costs, partially offset by a $10.4 million increase in cost of sales, a $21.2 million increase in SG&A expenses, a $27.3 million increase in R&D expenses and a $0.8 million increase in amortization of acquired intangible assets.
 
Our specialty pharmaceuticals segment operating income in the third quarter of 2011 was $433.5 million, compared to operating income of $377.5 million in the third quarter of 2010. The $56.0 million increase in our specialty pharmaceuticals segment operating income was due primarily to an increase in product net sales of our eye care pharmaceuticals, Botox ® and skin care product lines, partially offset by an increase in promotion, selling and marketing expenses and an increase in R&D expenses. 
 
Our medical devices segment operating income in the third quarter of 2011 was $68.8 million, compared to operating income of $67.2 million in the third quarter of 2010. The $1.6 million increase in our medical devices segment operating income was due primarily to an increase in product net sales of our breast aesthetics and facial aesthetics product lines, partially offset by a decrease in product net sales of our obesity intervention product line, an increase in overall promotion and selling expenses and an increase in R&D expenses.
 
Our consolidated operating income in the first nine months of 2011 was $955.1 million, or 24.1% of product net sales, compared to a consolidated operating loss of $108.8 million, or (3.1)% of product net sales in the first nine months of 2010. The $1,063.9 million increase in consolidated operating income was due to $609.9 million of legal settlement costs in the first nine months of 2010 that did not recur in the first nine months of 2011, a $434.8 million increase in product net sales, a $9.9 million decrease in amortization of acquired intangible assets and a $345.4 million decrease in impairment of intangible assets and related costs, partially offset by a $28.1 million decrease in other revenues, a $27.5 million increase in cost of sales, a $204.6 million increase in SG&A expenses, a $72.1 million increase in R&D expenses and a $3.8 million increase in restructuring charges. 
 
Our specialty pharmaceuticals segment operating income in the first nine months of 2011 was $1,286.3 million, compared to operating income of $1,076.0 million in the first nine months of 2010. The $210.3 million increase in our specialty pharmaceuticals segment operating income was due primarily to the same reasons discussed in the analysis of the third quarter of 2011. 
 
Our medical devices segment operating income in the first nine months of 2011 was $214.2 million, compared to operating income of $201.1 million in the first nine months of 2010. The $13.1 million increase in our medical devices segment operating income was due primarily to the same reasons discussed in the analysis of the third quarter of 2011.
Non-Operating Income and Expense
 
Total net non-operating income in the third quarter of 2011 was $12.4 million compared to total net non-operating expense of $36.7 million in the third quarter of 2010. Interest income in the third quarter of 2011 was $1.8 million compared to interest income of $1.6 million in the third quarter of 2010. Interest expense decreased $5.2 million to $15.2 million in the third quarter of 2011 compared to $20.4 million in the third quarter of 2010. Interest expense decreased primarily due to the conversion of our 1.50% Convertible Senior Notes due 2026, or 2026 Convertible Notes, in the second quarter of 2011, and a reversal of previously accrued statutory interest expense resulting from a change in estimate related to uncertain tax positions in the third quarter of 2011, compared to a charge for statutory interest expense in the third quarter of 2010, partially offset by an increase in interest expense due to the issuance in September 2010 of our 3.375% Senior Notes due 2020, or 2020 Notes. Other, net income was $25.8 million in the third quarter of 2011, consisting primarily of a net unrealized gain on derivative instruments of $16.8 million, $8.4 million in net realized gains from foreign currency transactions and a gain of $0.5 million on the sale of a third party equity investment. Other, net expense was $17.9 million in the third quarter of 2010, consisting primarily of a net unrealized loss on derivative instruments of $15.2 million and $3.4 million in net realized losses from foreign currency transactions.
 
Total net non-operating expense in the first nine months of 2011 was $39.1 million compared to $53.4 million in the first nine months of 2010. Interest income in the first nine months of 2011 was $5.6 million compared to interest income of $4.1 million in the first nine months of 2010. The increase in interest income was primarily due to higher average cash equivalent and short-term investment balances. Interest expense increased $4.2 million to $55.1 million in the first nine months of 2011 compared to $50.9 million in the first nine months of 2010. Interest expense increased primarily due to the issuance in September 2010 of our 2020 Notes and a net decrease in the reversal of previously accrued statutory interest expense resulting from a change in estimate related to uncertain tax positions in the first nine months of 2011 compared to the first nine months of 2010, partially offset by a decrease in interest expense due to the conversion of our 2026 Convertible Notes in the second quarter of 2011. Other, net income was $10.4 million in the first nine months of 2011, consisting primarily of a net unrealized gain on derivative instruments of $12.0 million and a gain of $1.4 million on the sale of a third party equity investment, partially offset by $3.6 million in net realized losses from foreign currency transactions. Other, net expense was $6.6 million in the first nine months of 2010, consisting primarily of a net unrealized loss on derivative instruments of $7.0 million and $0.6 million in net realized losses from foreign currency transactions.
 
Income Taxes
 
Our effective tax rate for the third quarter of 2011 was 29.7%. Our effective tax rate for the first nine months of 2011 was 28.1%. Included in our earnings before income taxes for the first nine months of 2011 are a $60.0 million upfront payment and a $20.0 million regulatory milestone payment related to a collaboration and co-promotion agreement with MAP, a $45.0 million upfront payment related to a collaboration and license agreement with Molecular Partners AG, intangible asset impairment charges of $20.4 million, restructuring charges of $4.6 million, fixed asset impairment charges of $2.2 million and a gain of $9.4 million from the substantially complete liquidation of a foreign subsidiary resulting from the discontinued development of EasyBand . In the first nine months of 2011, we recorded income tax benefits of $22.2 million and $7.4 million, respectively, associated with the upfront payment and regulatory milestone payment related to the collaboration and co-promotion agreement with MAP and income tax benefits of $4.6 million associated with the upfront payment related to the collaboration and license agreement with Molecular Partners AG. In the first nine months of 2011, we did not record any tax benefits related to the intangible asset impairment charges, restructuring charges, fixed asset impairment charges and the gain from the substantially complete liquidation of our investment in a foreign subsidiary resulting from the discontinued development of EasyBand since a portion of these charges are not tax deductible and we do not expect to be able to utilize the deductions for the tax deductible portion of these charges in the jurisdiction where the costs were incurred. Excluding the impact of the net pre-tax charges of $142.8 million and the net income tax benefits of $34.2 million for the items discussed above, our adjusted effective tax rate for the first nine months of 2011 was 27.6%. We believe that the use of an adjusted effective tax rate provides a more meaningful measure of the impact of income taxes on our results of operations because it excludes the effect of certain items that are not included as part of our core business activities. This allows investors to better determine the effective tax rate associated with our core business activities.
The calculation of our adjusted effective tax rate for the first nine months of 2011 is summarized below:

   
(in millions)
 
Earnings before income taxes, as reported
  $ 916.0  
Upfront payment for a collaboration and co-promotion agreement with MAP
    60.0  
Regulatory milestone payment for a collaboration and co-promotion agreement with MAP
    20.0  
Upfront payment for a collaboration and license agreement with Molecular Partners AG
    45.0  
Restructuring charges
    4.6  
Impairment of intangible assets
    20.4  
Aggregate net gain for the fixed asset impairment and gain from the substantially complete liquidation of a foreign subsidiary resulting from the discontinued development of Easyband
    (7.2 )
    $ 1,058.8  
         
Provision for income taxes, as reported
  $ 257.6  
Income tax benefit for:
       
     Upfront payment for a collaboration and co-promotion agreement with MAP
    22.2  
     Regulatory milestone payment for a collaboration and co-promotion agreement with MAP
    7.4  
     Upfront payment for a collaboration and license agreement with Molecular Partners AG
    4.6  
    $ 291.8  
         
Adjusted effective tax rate
    27.6 %
 
Our effective tax rate for the third quarter and first nine months of 2010 was 8.1% and 59.2%, respectively. Our effective tax rate for the year ended December 31, 2010 was 97.1% and our adjusted effective tax rate for the year ended December 31, 2010 was 28.0%. Included in our earnings before income taxes for 2010 are total pre-tax charges of $609.2 million in connection with the global settlement with the DOJ regarding our past U.S. sales and marketing practices relating to certain therapeutic uses of Botox ® , a $369.1 million aggregate charge related to the impairment of the Sanctura ® Assets and related costs, a $33.0 million charge related to the termination of a distributor agreement in Turkey, a $43.0 million charge for an upfront payment for technology that has not achieved regulatory approval, restructuring charges of $0.3 million and license fee income of $36.0 million related to an upfront fee for product rights we licensed to Bristol-Myers Squibb Company. In 2010, we recorded income tax benefits of $21.4 million related to the global settlement with the DOJ regarding our past U.S. sales and marketing practices relating to certain therapeutic uses of Botox ® , $140.5 million related to the impairment of the Sanctura ® Assets and related costs, $2.8 million related to the termination of a distributor agreement in Turkey, $15.6 million related to the upfront payment for technology that has not achieved regulatory approval and $0.2 million related to the restructuring charges, and an income tax expense of $13.7 million related to the upfront license fee income. Excluding the impact of the net pre-tax charges of $1,018.6 million and the net income tax benefits of $166.8 million for the items discussed above, our adjusted effective tax rate for 2010 was 28.0%.
The calculation of our adjusted effective tax rate for the year ended December 31, 2010 is summarized below:
 
   
(in millions)
 
Earnings before income taxes, as reported
  $ 170.8  
Settlement with the DOJ related to U.S. sales and marketing practices for Botox ®
    609.2  
Impairment of the Sanctura ® Assets and related costs
    369.1  
Termination of a distributor agreement in Turkey
    33.0  
Upfront payment for technology that has not achieved regulatory approval
    43.0  
Restructuring charges
    0.3  
Upfront license fee income
    (36.0 )
    $ 1,189.4  
         
Provision for income taxes, as reported
  $ 165.9  
Income tax benefit (provision) for:
       
Settlement with the DOJ related to U.S. sales and marketing practices for Botox ®
    21.4  
Impairment of the Sanctura ® Assets and related costs
    140.5  
Termination of a distributor agreement in Turkey
    2.8  
Upfront payment for technology that has not achieved regulatory approval
    15.6  
Restructuring charges
    0.2  
Upfront license fee income
    (13.7 )
    $ 332.7  
         
Adjusted effective tax rate
    28.0 %
 
The decrease in the adjusted effective tax rate to 27.6% in the first nine months of 2011 compared to the adjusted effective tax rate for the year ended December 31, 2010 of 28.0% is primarily attributable to an increase in the mix of earnings in lower tax rate jurisdictions, partially offset by changes in tax positions affecting unrecognized tax benefits.
 
Net Earnings Attributable to Noncontrolling Interest
 
Our net earnings attributable to noncontrolling interest for our majority-owned subsidiaries were $1.2 million and $1.8 million in the third quarter of 2011 and 2010, respectively, and $3.7 million and $4.3 million in the first nine months of 2011 and 2010, respectively.
 
Net Earnings Attributable to Allergan, Inc. 
 
Our net earnings attributable to Allergan, Inc. in the third quarter of 2011 were $249.8 million compared to a net loss attributable to Allergan, Inc. of $670.5 million in the third quarter of 2010. The $920.3 million increase in net earnings attributable to Allergan, Inc. was primarily the result of the increase in operating income of $1,035.4 million, the decrease in net non-operating expense of $49.1 million and the decrease in net earnings attributable to noncontrolling interest of $0.6 million, partially offset by the increase in the provision for income taxes of $164.8 million.
 
Our net earnings attributable to Allergan, Inc. in the first nine months of 2011 were $654.7 million compared to a net loss attributable to Allergan, Inc. of $262.5 million in the first nine months of 2010. The $917.2 million increase in net earnings attributable to Allergan, Inc. was primarily the result of the increase in operating income of $1,063.9 million, the decrease in net non-operating expense of $14.3 million and the decrease in net earnings attributable to noncontrolling interest of $0.6 million, partially offset by the increase in the provision for income taxes of $161.6 million.
 
Liquidity and Capital Resources
 
We assess our liquidity by our ability to generate cash to fund our operations. Significant factors in the management of liquidity are: funds generated by operations; levels of accounts receivable, inventories, accounts payable and capital expenditures; the extent of our stock repurchase program; funds required for acquisitions and other transactions; funds available under our credit facilities; and financial flexibility to attract long-term capital on satisfactory terms.
 
Historically, we have generated cash from operations in excess of working capital requirements. The net cash provided by operating activities for the first nine months of 2011 was $701.5 million compared to $820.9 million for the first nine months of 2010. Cash flow from operating activities decreased in the first nine months of 2011 compared to the first nine months of 2010 primarily as a result of an increase in cash required to fund changes in trade receivables, inventories, other current assets, accounts payable and income taxes, partially offset by a decrease in cash used to fund changes in other liabilities, and an increase in cash from net earnings from operations, including the effect of adjusting for non-cash items. In
 
43

the first nine months of 2011, we made upfront and milestone payments of $125.0 million for various licensing and collaboration agreements compared to $43.0 million in the first nine months of 2010. These amounts were included in our net earnings (loss) for the respective periods. In the first nine months of 2010, we received an upfront licensing fee receipt of $36.0 million that did not recur in 2011. In 2010, we recorded total pre-tax charges of $609.2 million in connection with the global settlement with the DOJ regarding our past U.S. sales and marketing practices related to certain therapeutic uses of Botox ® . We paid $594.0 million of the global settlement costs in the fourth quarter of 2010 and the remaining $15.2 million in the first nine months of 2011. In the first nine months of 2011, we paid pension contributions of $17.7 million to our U.S. defined benefit pension plan. We did not make any pension contributions to our U.S. defined benefit pension plan in the first nine months of 2010.
 
Net cash provided by investing activities was $502.7 million in the first nine months of 2011 compared to net cash used in investing activities of $649.8 million in the first nine months of 2010. In the first nine months of 2011, we received $1,073.9 million from the maturities of short-term investments and $2.5 million from the sale of equity investments and property, plant and equipment. In the first nine months of 2011, we purchased $391.2 million of short-term investments and paid $98.9 million, net of cash acquired, for the acquisitions of Vicept, Alacer and Precision Light and the purchase of our distributor’s business related to our products in South Africa. Additionally, we invested $75.4 million in new facilities and equipment and $7.9 million in capitalized software. In the first nine months of 2010, we purchased $499.3 million of short-term investments and paid $69.8 million, net of cash acquired, for the acquisition of Serica and the purchase of our distributor’s business related to our products in Turkey and $1.7 million for a contractual purchase price adjustment related to our 2009 acquisition of Samil Allergan Ophthalmic Joint Venture Company. Additionally, we invested $50.3 million in new facilities and equipment and $10.2 million in capitalized software and paid $18.5 million for intangible assets related to the reacquisition of Botox ® Cosmetics distribution rights in Japan and China. We currently expect to invest between $140.0 million and $160.0 million in capital expenditures for manufacturing and administrative facilities, manufacturing equipment and other property, plant and equipment during 2011.
 
Net cash used in financing activities was $979.5 million in the first nine months of 2011 compared to net cash provided by financing activities of $490.0 million in the first nine months of 2010. In the first nine months of 2011, we paid $808.9 million for the repayment and conversion of our 2026 Convertible Notes ($649.7 million principal amount and $159.2 million equity repurchase), repurchased approximately 5.0 million shares of our common stock for $374.0 million, paid $45.8 million in dividends to stockholders and paid contingent consideration of $3.0 million. This use of cash was partially offset by $25.7 million in net borrowing of notes payable, $205.7 million received from the sale of stock to employees and $20.8 million in excess tax benefits from share-based compensation. On September 14, 2010, we issued our 2020 Notes in a registered offering for an aggregate principal amount of $650.0 million and received proceeds of $648.0 million, net of original discount. Additionally, in the first nine months of 2010, we received $90.6 million from the sale of stock to employees and $4.7 million in excess tax benefits from share-based compensation. These amounts were partially reduced by the repurchase of 3.2 million shares of our common stock for $198.9 million, net repayments of notes payable of $3.0 million, a cash payment of $6.0 million for offering fees related to the issuance of the 2020 Notes and $45.4 million in dividends paid to stockholders.
 
Effective October 24, 2011, our Board of Directors declared a cash dividend of $0.05 per share, payable December 1, 2011 to stockholders of record on November 10, 2011. 
 
We maintain an evergreen stock repurchase program. Our evergreen stock repurchase program authorizes us to repurchase our common stock for the primary purpose of funding our stock-based benefit plans. Under the stock repurchase program, we may maintain up to 18.4 million repurchased shares in our treasury account at any one time. At September 30, 2011, we held approximately 2.5 million treasury shares under this program. Effective July 1, 2011, our current Rule 10b5-1 plan authorizes our broker to purchase our common stock traded in the open market pursuant to our evergreen stock repurchase program. The terms of the plan set forth a maximum limit of 2.0 million shares to be repurchased through December 31, 2011, certain quarterly maximum and minimum volume limits, and the plan is cancellable at any time in our sole discretion and in accordance with applicable insider trading laws.
 
Our 2020 Notes, which were sold at 99.697% of par value with an effective interest rate of 3.41%, are unsecured and pay interest semi-annually on the principal amount of the notes at a rate of 3.375% per annum, and are redeemable at any time at our option, subject to a make-whole provision based on the present value of remaining interest payments at the time of the redemption. The aggregate outstanding principal amount of the 2020 Notes will be due and payable on September 15, 2020, unless earlier redeemed by us.
 
Our 5.75% Senior Notes due 2016, or 2016 Notes, were sold at 99.717% of par value with an effective interest rate of 5.79%, pay interest semi-annually on the principal amount of the notes at a rate of 5.75% per annum, and are redeemable at any time at our option, subject to a make-whole provision based on the present value of remaining interest payments at the
 
44

time of the redemption. The aggregate outstanding principal amount of the 2016 Notes is due and payable on April 1, 2016, unless earlier redeemed by us.
 
At September 30, 2011, we had a committed long-term credit facility, a commercial paper program, a medium-term note program, a shelf registration statement that allows us to issue additional securities, including debt securities, in one or more offerings from time to time, a real estate mortgage and various foreign bank facilities. The committed long-term credit facility allows for borrowings of up to $800.0 million. The commercial paper program also provides for up to $600.0 million in borrowings. However, our combined borrowings under our committed long-term credit facility and our commercial paper program may not exceed $800.0 million in the aggregate. Borrowings under the committed long-term credit facility and medium-term note program are subject to certain financial and operating covenants that include, among other provisions, maximum leverage ratios. Certain covenants also limit subsidiary debt. We believe we were in compliance with these covenants at September 30, 2011. At September 30, 2011, we had no borrowings under our committed long-term credit facility, $25.0 million in borrowings outstanding under the medium-term note program (maturing April 2012), $20.0 million in borrowings outstanding under the real estate mortgage, $53.8 million in borrowings outstanding under various foreign bank facilities and no borrowings under the commercial paper program. Commercial paper, when outstanding, is issued at current short-term interest rates. Additionally, any future borrowings that are outstanding under the long-term credit facility may be subject to a floating interest rate. We may from time to time seek to retire or purchase our outstanding debt. On October 28, 2011, we amended and restated our committed long-term credit facility to extend the maturity date to October 2016 and modify certain other terms, including interest rates and fees. The termination date can be further extended from time to time upon our request and acceptance by the issuer of the facility for a period of one year from the last scheduled termination date for each request accepted.
 
On March 8, 2011, we announced our intention to redeem the 2026 Convertible Notes at the principal amount plus accrued interest on April 5, 2011. Most note holders elected to exercise the conversion feature of the 2026 Convertible Notes prior to redemption and we elected to pay the full conversion value in cash. We paid approximately $800.3 million in aggregate conversion value for the converted notes with an aggregate principal amount of $641.1 million in May 2011. In addition, on April 5, 2011 we redeemed notes with a principal amount of $8.6 million that were not converted.
 
At December 31, 2010, we had net pension and postretirement benefit obligations totaling $204.7 million. Future funding requirements are subject to change depending on the actual return on net assets in our funded pension plans and changes in actuarial assumptions. In 2011, we expect to pay pension contributions of between $35.0 million and $45.0 million for our U.S. and non-U.S. pension plans and between $1.0 million and $2.0 million for our other postretirement plan.
 
On January 28, 2011, we entered into a collaboration agreement and a co-promotion agreement with MAP for the exclusive development and commercialization by us and MAP of Levadex ® within the United States to certain headache specialist physicians for the acute treatment of migraine in adults, migraine in adolescents and other indications that may be approved by the parties. Under the terms of the agreements, we made a $60.0 million upfront payment to MAP in February 2011. The terms of the agreements also include up to $97.0 million in additional payments to MAP upon MAP meeting certain development and regulatory milestones. In August 2011, we made a $20.0 million milestone payment to MAP for the FDA acceptance of an NDA filing for Levadex ® .
 
On May 4, 2011, we announced a license agreement with Molecular Partners AG, pursuant to which we obtained exclusive global rights in the field of ophthalmology for MP0112, a Phase II proprietary therapeutic DARPin ® protein targeting vascular endothelial growth factor receptors under investigation for the treatment of retinal diseases. Under the terms of the agreement, we made a $45.0 million upfront payment to Molecular Partners AG in May 2011. The terms of the agreement also include potential future development, regulatory and sales milestone payments to Molecular Partners AG of up to $375.0 million, as well as potential future royalty payments.
 
On July 22, 2011, we completed the acquisition of Vicept for an upfront payment of $74.1 million, net of cash acquired, plus up to an aggregate of $200.0 million in payments contingent upon achieving certain future development and regulatory milestones plus additional payments contingent upon acquired products achieving certain sales milestones.
 
In May 2011, a generic version of Elestat ® was launched in the United States and we expect a generic version of Zymar ® to be launched in the United States during 2011. In addition, generic versions of some branded pharmaceutical products sold by our competitors have been launched or are expected to be launched in the United States during 2011. We do not believe that our liquidity will be materially impacted in 2011 by generic competition.
 
As of December 31, 2010, $912.8 million of our existing cash and equivalents are held by non-U.S. subsidiaries. We currently plan to use these funds indefinitely in our operations outside the United States. Withholding and U.S. taxes have not been provided for unremitted earnings of certain non-U.S. subsidiaries because we have reinvested these earnings indefinitely in such operations. At December 31, 2010, we had approximately $2,109.4 million in unremitted earnings outside the United
 
45

States for which withholding and U.S. taxes were not provided. Tax costs would be incurred if these earnings were remitted to the United States.
 
We believe that the net cash provided by operating activities, supplemented as necessary with borrowings available under our existing credit facilities and existing cash and equivalents and short-term investments, will provide us with sufficient resources to meet our current expected obligations, working capital requirements, debt service and other cash needs over the next year.
ALLERGAN, INC.
 
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
 
In the normal course of business, our operations are exposed to risks associated with fluctuations in interest rates and foreign currency exchange rates. We address these risks through controlled risk management that includes the use of derivative financial instruments to economically hedge or reduce these exposures. We do not enter into financial instruments for trading or speculative purposes. 
 
To ensure the adequacy and effectiveness of our interest rate and foreign exchange hedge positions, we continually monitor our interest rate swap positions and foreign exchange forward and option positions both on a stand-alone basis and in conjunction with our underlying interest rate and foreign currency exposures, from an accounting and economic perspective.
 
However, given the inherent limitations of forecasting and the anticipatory nature of the exposures intended to be hedged, we cannot assure you that such programs will offset more than a portion of the adverse financial impact resulting from unfavorable movements in either interest or foreign exchange rates. In addition, the timing of the accounting for recognition of gains and losses related to mark-to-market instruments for any given period may not coincide with the timing of gains and losses related to the underlying economic exposures and, therefore, may adversely affect our consolidated operating results and financial position.
 
Interest Rate Risk
 
Our interest income and expense are more sensitive to fluctuations in the general level of U.S. interest rates than to changes in rates in other markets. Changes in U.S. interest rates affect the interest earned on our cash and equivalents and short-term investments and interest expense on our debt, as well as costs associated with foreign currency contracts.
 
On January 31, 2007, we entered into a nine-year, two-month interest rate swap with a $300.0 million notional amount with semi-annual settlements and quarterly interest rate reset dates. The swap receives interest at a fixed rate of 5.75% and pays interest at a variable interest rate equal to 3-month LIBOR plus 0.368%, and effectively converts $300.0 million of the $800.0 million aggregate principal amount of our 2016 Notes to a variable interest rate. Based on the structure of the hedging relationship, the hedge meets the criteria for using the short-cut method for a fair value hedge. The investment in the derivative and the related long-term debt are recorded at fair value. At September 30, 2011 and December 31, 2010, we recognized in our consolidated balance sheets an asset reported in “Investments and other assets” and a corresponding increase in “Long-term debt” associated with the fair value of the derivative of $49.0 million and $42.3 million, respectively. The differential to be paid or received as interest rates change is accrued and recognized as an adjustment of interest expense related to the 2016 Notes. During the three and nine month periods ended September 30, 2011, we recognized $3.7 million and $11.4 million, respectively, as a reduction of interest expense due to the differential to be received. During the three and nine month periods ended September 30, 2010, we recognized $3.8 million and $11.3 million, respectively, as a reduction of interest expense due to the differential to be received.
 
In February 2006, we entered into interest rate swap contracts based on 3-month LIBOR with an aggregate notional amount of $800.0 million, a swap period of 10 years and a starting swap rate of 5.198%. We entered into these swap contracts as a cash flow hedge to effectively fix the future interest rate for our 2016 Notes. In April 2006, we terminated the interest rate swap contracts and received approximately $13.0 million. The total gain is being amortized as a reduction to interest expense over a 10 year period to match the term of the 2016 Notes. As of September 30, 2011, the remaining unrecognized gain, net of tax, of $3.5 million is recorded as a component of accumulated other comprehensive loss.
 
At September 30, 2011, we had approximately $53.8 million of variable rate debt. If interest rates were to increase or decrease by 1% for the year, annual interest expense, including the effect of the $300.0 million notional amount of the interest rate swap entered into on January 31, 2007, would increase or decrease by approximately $3.5 million. Commercial paper, when outstanding, is issued at current short-term interest rates. Additionally, any future borrowings that are outstanding under the long-term credit facility may be subject to a floating interest rate. Therefore, higher interest costs could occur if interest rates increase in the future.
 
The following tables present information about certain of our investment portfolio and our debt obligations at September 30, 2011 and December 31, 2010. 
 
   
September 30, 2011
 
   
Maturing in
   
Fair
Market
Value
 
   
2011
   
2012
   
2013
   
2014
   
2015
   
Thereafter
   
Total
 
   
(in millions, except interest rates)
 
ASSETS
                                               
Cash Equivalents and Short-Term Investments:
                                               
Commercial Paper
  $ 934.8     $     $     $     $     $     $ 934.8     $ 934.8  
Weighted Average Interest Rate
    0.11 %                                   0.11 %        
Foreign Time Deposits
    189.5                                     189.5       189.5  
Weighted Average Interest Rate
    0.84 %                                   0.84 %        
Other Cash Equivalents
    991.6                                     991.6       991.6  
Weighted Average Interest Rate
    0.19 %                                   0.19 %        
Total Cash Equivalents and
         Short-Term Investments
  $ 2,115.9     $     $     $     $     $     $ 2,115.9     $ 2,115.9  
Weighted Average Interest Rate
    0.21 %                                   0.21 %        
                                                                 
LIABILITIES
                                                               
Debt Obligations:
                                                               
Fixed Rate (US$)
  $     $ 25.0     $     $     $     $ 1,467.2     $ 1,492.2     $ 1,669.5  
Weighted Average Interest Rate
          7.47 %                       4.74 %     4.78 %        
Other Variable Rate (non-US$)
    53.8                                     53.8       53.8  
Weighted Average Interest Rate
    8.15 %                                   8.15 %        
Total Debt Obligations (a)
  $ 53.8     $ 25.0     $     $     $     $ 1,467.2     $ 1,546.0     $ 1,723.3  
Weighted Average Interest Rate
    8.15 %     7.47 %                       4.74 %     4.90 %        
                                                                 
INTEREST RATE DERIVATIVES
                                                               
Interest Rate Swaps:
                                                               
Fixed to Variable (US$)
  $     $     $     $     $     $ 300.0     $ 300.0     $ 49.0  
Average Pay Rate
                                  0.74 %     0.74 %        
Average Receive Rate
                                  5.75 %     5.75 %        
       
(a)
Total debt obligations in the unaudited condensed consolidated balance sheet at September 30, 2011 include debt obligations of $1,546.0 million and the interest rate swap fair value adjustment of $49.0 million.
 
   
December 31, 2010
 
   
Maturing in
   
Fair
Market
Value
 
   
2011
   
2012
   
2013
   
2014
   
2015
   
Thereafter
   
Total
 
   
(in millions, except interest rates)
 
ASSETS
                                               
Cash Equivalents and Short-Term Investments:
                                               
Commercial Paper
  $ 1,716.0     $     $     $     $     $     $ 1,716.0     $ 1,716.0  
Weighted Average Interest Rate
    0.25 %                                   0.25 %        
Foreign Time Deposits
    209.6                                     209.6       209.6  
Weighted Average Interest Rate
    0.45 %                                   0.45 %        
Other Cash Equivalents
    707.0                                     707.0       707.0  
Weighted Average Interest Rate
    0.38 %                                   0.38 %        
Total Cash Equivalents and
        Short-Term Investments
  $ 2,632.6     $     $     $     $     $     $ 2,632.6     $ 2,632.6  
Weighted Average Interest Rate
    0.30 %                                   0.30 %        
                                                                 
LIABILITIES
                                                               
Debt Obligations:
                                                               
Fixed Rate (US$)
  $ 642.5     $ 25.0     $     $     $     $ 1,466.9     $ 2,134.4     $ 2,221.1  
Weighted Average Interest Rate
    5.59 %     7.47 %                       4.74 %     5.02 %        
Other Variable Rate (non-US$)
    28.1                                     28.1       28.1  
Weighted Average Interest Rate
    6.80 %                                   6.80 %        
Total Debt Obligations (a)
  $ 670.6     $ 25.0     $     $     $     $ 1,466.9     $ 2,162.5     $ 2,249.2  
Weighted Average Interest Rate
    5.64 %     7.47 %                       4.74 %     5.05 %        
                                                                 
INTEREST RATE DERIVATIVES
                                                               
Interest Rate Swaps:
                                                               
Fixed to Variable (US$)
  $     $     $     $     $     $ 300.0     $ 300.0     $ 42.3  
Average Pay Rate
                                  0.67 %     0.67 %        
Average Receive Rate
                                  5.75 %     5.75 %        
       
(a)
Total debt obligations in the unaudited condensed consolidated balance sheet at December 31, 2010 include debt obligations of $2,162.5 million and the interest rate swap fair value adjustment of $42.3 million. 
Foreign Currency Risk
 
Overall, we are a net recipient of currencies other than the U.S. dollar and, as such, benefit from a weaker dollar and are adversely affected by a stronger dollar relative to major currencies worldwide. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may negatively affect our consolidated revenues or operating costs and expenses as expressed in U.S. dollars.
 
From time to time, we enter into foreign currency option and forward contracts to reduce earnings and cash flow volatility associated with foreign exchange rate changes to allow our management to focus its attention on our core business issues. Accordingly, we enter into various contracts which change in value as foreign exchange rates change to economically offset the effect of changes in the value of foreign currency assets and liabilities, commitments and anticipated foreign currency denominated sales and operating expenses. We enter into foreign currency option and forward contracts in amounts between minimum and maximum anticipated foreign exchange exposures, generally for periods not to exceed 18 months.
 
We use foreign currency option contracts, which provide for the sale or purchase of foreign currencies to offset foreign currency exposures expected to arise in the normal course of our business. While these instruments are subject to fluctuations in value, such fluctuations are anticipated to offset changes in the value of the underlying exposures.
 
All of our outstanding foreign currency option contracts are entered into to reduce the volatility of earnings generated in currencies other than the U.S. dollar, primarily earnings denominated in the Canadian dollar, Mexican peso, Australian dollar, Brazilian real, euro, Korean won and Turkish lira. Current changes in the fair value of open foreign currency option contracts and any realized gains (losses) on settled contracts are recorded through earnings as “Other, net” in the accompanying unaudited condensed consolidated statements of operations. The premium costs of purchased foreign exchange option contracts are recorded in “Other current assets” and amortized to “Other, net” over the life of the options.
 
All of our outstanding foreign exchange forward contracts are entered into to offset the change in value of certain intercompany receivables or payables that are subject to fluctuations in foreign currency exchange rates. The realized and unrealized gains and losses from foreign currency forward contracts and the revaluation of the foreign denominated intercompany receivables or payables are recorded through “Other, net” in the accompanying unaudited condensed consolidated statements of operations.
The following table provides information about our foreign currency derivative financial instruments outstanding as of September 30, 2011 and December 31, 2010. The information is provided in U.S. dollars, as presented in our unaudited condensed consolidated financial statements:
 
   
September 30, 2011
   
December 31, 2010
 
   
Notional
Amount
   
Average Contract
Rate or Strike
Amount
   
Notional
Amount
   
Average Contract
Rate or Strike
Amount
 
   
(in millions)
         
(in millions)
       
Foreign currency forward contracts:
                       
(Receive U.S. dollar/pay foreign currency)
                       
Japanese yen
  $ 14.3       76.91     $ 6.0       84.09  
Australian dollar
    23.6       1.03       15.7       0.98  
New Zealand dollar
    3.3       0.83       1.1       0.74  
Poland zloty
    1.6       3.15       2.8       3.03  
Singapore dollar
    1.2       1.24              
    $ 44.0             $ 25.6          
Estimated fair value
  $ 1.9             $ (0.9 )        
                                 
Foreign currency forward contracts:
                               
(Pay U.S. dollar/receive foreign currency)
                               
Euro
  $ 41.4       1.38     $ 39.9       1.33  
Estimated fair value
  $ (1.1 )           $ 0.2          
                                 
Foreign currency sold — put options:
                               
Canadian dollar
  $ 90.3       1.00     $ 68.1       1.04  
Mexican peso
    5.4       12.91       20.0       12.73  
Australian dollar
    65.1       0.97       44.2       0.87  
Brazilian real
    52.8       1.80       36.9       1.92  
Euro
    109.5       1.36       139.4       1.34  
Korean won
    5.3       1154.23       17.3       1153.22  
Turkish lira
    4.9       1.58       20.5       1.55  
    $ 333.3             $ 346.4          
Estimated fair value
  $ 23.4             $ 10.4          
ALL ERGAN, INC. 
 
Item 4.  Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and our Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, including our Principal Executive Officer and our Principal Financial Officer, does not expect that our disclosure controls or procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Also, we have investments in certain unconsolidated entities. As we do not control or manage these entities, our disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.
 
We carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and our Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2011, the end of the quarterly period covered by this report. Based on the foregoing, our Principal Executive Officer and our Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective and were operating at the reasonable assurance level.
 
Further, management determined that, as of September 30, 2011, there were no changes in our internal control over financial reporting that occurred during the quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ALL ERGAN, INC.
 
PART II — OTHER INFORMATION
 
Item 1 Legal Proceedings

The following supplements and amends the discussion set forth under Part I, Item 3 “Legal Proceedings” of our Annual Report on Form 10-K for the year ended December 31, 2010 and Part II, Item 1 “Legal Proceedings” of our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2011 and June 30, 2011 and is limited to certain recent developments concerning our legal proceedings.
 
Allergan, Inc. v. Cayman Chemical Company, et al. 
 
            In September 2011, the U.S. District Court for Central District of California ordered the reopening of the case. In September 2011, the court set the trial for our unfair competition claims for February 12, 2013 and the trial for our patent claims for April 2, 2013.
 
Kramer et al. v. Allergan, Inc.

In September 2011, the court entered a dismissal with prejudice as to plaintiff Doolittle. In October 2011, the court set the trial as to plaintiff Powell for April 30, 2012.
 
Alphagan ® P Patent Litigation

In August 2011, the U.S. Court of Appeals for the Federal Circuit denied Apotex’s petition for rehearing en banc . In August 2011, the U.S. Court of Appeals for the Federal Circuit issued a mandate affirming-in-part and reversing-in-part the findings of the U.S. District Court for the District of Delaware.
 
Zymar ® Patent Litigation
 
In July 2011, Lupin filed an answer to the amended complaint and counterclaims. In August 2011, the court consolidated the Lupin Zymar ® and Lupin Zymaxid ® cases and set a bench trial for January 14, 2013. In August 2011, we, Senju and Kyorin filed an answer to Lupin’s counterclaims.
 
In September 2011, we filed a notice of subsequent event regarding receipt of a notice from the U.S. Patent and Trademark Office regarding its intent to issue a reexamination certificate for the ‘045 patent.
 
In September 2011, we received a paragraph 4 invalidity and noninfringement Hatch-Waxman Act certification from Hi-Tech Pharmacal Co., Inc., or Hi-Tech, indicating that Hi-Tech had filed an ANDA with the FDA seeking approval of a generic form of Zymar ® gatifloxacin 0.3% ophthalmic solution. In the certification, Hi-Tech contends that the ‘283 and ‘045 patents, both of which are licensed to us and are listed in the Orange Book under Zymar ® , are invalid and/or not infringed by the proposed Hi-Tech product. In October 2011, we, Senju and Kyorin filed a complaint against Hi-Tech in the U.S. District Court for the District of Delaware. The complaint alleges that Hi-Tech’s proposed product infringes the ‘283 and ‘045 patents.
 
Combigan ® Patent Litigation
 
In August 2011, the U.S. District Court for the Eastern District of Texas held a bench trial and issued its opinion holding that U.S. Patent Nos. 7,030,149, 7,320,976, 7,323,463 and 7,642,258 are not invalid, and are enforceable and infringed by defendants’ proposed products. In August 2011, the court also entered a final judgment and injunction in our favor and against all defendants and granted defendants’ motion for partial summary judgment. In September 2011, defendants filed notices of appeal and we filed a notice of cross-appeal.
 
In October 2011, the Canadian Federal Court held a bench trial regarding our claims against Sandoz Canada and took the matter under submission.
 
Latisse ® Patent Litigation
 
In August 2011, we and Duke University filed a complaint against Hi-Tech in the U.S. District Court for the Middle District of North Carolina. The complaint alleges that Hi-Tech’s proposed product infringes U.S. Patent Nos. 7,351,404,
 
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7,388,029 and 6,403,649. In October 2011, Hi-Tech filed an answer to the complaint and counterclaims.
 
In September 2011, the Apotex action and the Sandoz action were consolidated.
 
In October 2011, we stipulated to the dismissal without prejudice of our claims regarding U.S. Patent No. 6,403,649 against Apotex and Sandoz.
 
Lumigan ® Patent Litigation
 
           In September 2011, the U.S. District Court for the District of Delaware issued its opinion holding that U.S. Patent Nos. 5,688,819 and 6,403,649 are not invalid, and are enforceable and infringed by defendants’ proposed products and entered a final judgment and injunction in our favor and against all defendants. In October 2011, defendants filed notices of appeal.
 
Lumigan ® 0.01% Patent Litigation
 
In August 2011, we filed a complaint against Sandoz in the U.S. District Court for the Eastern District of Texas. The complaint alleges that Sandoz’s proposed product infringes U.S. Patent Nos. 5,688,819 and 7,851,504. In September 2011, Sandoz filed an answer to the complaint and counterclaims. In October 2011, we filed an answer to Sandoz’s counterclaims.
 
In October 2011, we received a paragraph 4 invalidity and noninfringement Hatch-Waxman Act certification from Lupin indicating that Lupin had filed an ANDA with the FDA seeking approval of a generic form of Lumigan ®   0.01% bimatoprost ophthalmic solution. In the certification, Lupin contends that U.S. Patent No. 7,851,504, which is listed in the Orange Book under Lumigan ® 0.01%, is invalid and/or not infringed by the proposed Lupin product.
 
Zymaxid ® Patent Litigation
 
In August 2011, the court consolidated the Lupin Zymar ® and Lupin Zymaxid ® cases and set a bench trial for January 14, 2013.
 
In August 2011, we received a paragraph 4 invalidity and noninfringement Hatch-Waxman Act certification from Hi-Tech indicating that Hi-Tech had filed an ANDA with the FDA seeking approval of a generic form of Zymaxid ® gatifloxacin 0.5% ophthalmic solution. In the certification, Hi-Tech contends that the ‘283 and ’045 patents, both of which are licensed to us and are listed in the Orange Book under Zymaxid ® , are invalid and/or not infringed by the proposed Hi-Tech product.
 
In September 2011, we filed a notice of subsequent event regarding receipt of a notice from the U.S. Patent and Trademark Office regarding its intent to issue a reexamination certificate for the ‘045 patent.
 
In October 2011, we filed a complaint against Hi-Tech in the U.S. District Court for the District of Delaware. The complaint alleges that Hi-Tech’s proposed product infringes the’283 and ‘045 patents.
 
Government Investigations
 
In September 2011, we received service of process of a Civil Investigative Demand from the Commonwealth of Massachusetts Office of the Attorney General, Medicaid Fraud Division. The Civil Investigative Demand requests production of documents and information relating to our Eye Care Business Advisor Group, Allergan Access and BSM Connect for Ophthalmology. 
 
Stockholder Derivative Litigation
 
Pompano Beach Police & Firefighters’ Retirement System Action; Himmel Action; Rosenbloom Action
 
In August 2011, we and the individual defendants filed a motion to dismiss the first amended verified consolidated complaint.
 
We are involved in various other lawsuits and claims arising in the ordinary course of business. These other matters are, in the opinion of management, immaterial both individually and in the aggregate with respect to our consolidated financial position, liquidity or results of operations. Because of the uncertainties related to the incurrence, amount and range of loss on any pending litigation, investigation, inquiry or claim, management is currently unable to predict the ultimate
 
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outcome of any litigation, investigation, inquiry or claim, determine whether a liability has been incurred or make an estimate of the reasonably possible liability that could result from an unfavorable outcome. We believe however, that the liability, if any, resulting from the aggregate amount of uninsured damages for any outstanding litigation, investigation or claim will not have a material adverse effect on our consolidated financial position, liquidity or results of operations. However, an adverse ruling in a patent infringement lawsuit involving us could materially affect our ability to sell one or more of our products or could result in additional competition. In view of the unpredictable nature of such matters, we cannot provide any assurances regarding the outcome of any litigation, investigation, inquiry or claim to which we are a party or the impact on us of an adverse ruling in such matters. 
 
Ite m 1A.   Risk Factors
 
There have been no material changes to the risk factors previously disclosed by us in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as supplemented and amended by the risk factors previously disclosed by us in Part II, Item 1A “Risk Factors” of our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2011 and June 30, 2011.
 
Ite m 2.   Unregistered Sales of Equity Securities and Use of Proceeds
 
The following table discloses the purchases of our equity securities during the third fiscal quarter of 2011. 
 
Period
 
 
Total  Nu mber
of Shares
Purchased(1)
   
Average
Price Paid
per Share
   
Total Number
of Shares
Purchased as Part
of Publicly
Announced Plans
or Programs
   
Maximum Number
(or Approximate Dollar
Value) of Shares that
May Yet be Purchased
Under the Plans
or Programs(2)
 
July 1, 2011 to July 31, 2011
    291,933     $ 83.60       291,933       15,971,491  
August 1, 2011 to August 31, 2011
    542,000       76.13       542,000       15,636,159  
September 1, 2011 to September 30, 2011
    116,067       80.17       116,067       15,941,477  
Total
    950,000     $ 78.92       950,000       N/A  
                                 

(1)
We maintain an evergreen stock repurchase program, which we first announced on September 28, 1993. Under the stock repurchase program, we may maintain up to 18.4 million repurchased shares in our treasury account at any one time. At September 30, 2011, we held approximately 2.5 million treasury shares under this program. Effective July 1, 2011, our current Rule 10b5-1 plan authorizes our broker to purchase our common stock traded in the open market pursuant to our evergreen stock repurchase program. The terms of the plan set forth a maximum limit of 2.0 million shares to be repurchased through December 31, 2011, certain quarterly maximum and minimum volume limits, and the plan is cancellable at any time in our sole discretion and in accordance with applicable insider trading laws. 
(2)
The share numbers reflect the maximum number of shares that may be purchased under our stock repurchase program and are as of the end of each of the respective periods. 
 
Item  3.   Defaults Upon Senior Securities
 
None. 
 
Ite m 4.   (Removed and Reserved)
 
Ite m 5.   Other Information
 
None. 
 
Ite m 6.   Exhibits
 
Reference is made to the Exhibit Index included herein. 
S IGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date: November  3 , 2011
 
     
   
ALLERGAN, INC.
     
   
/s/ Jeffrey L. Edwards
   
Jeffrey L. Edwards
Executive Vice President,
Finance and Business Development,
Chief Financial Officer
(Principal Financial Officer)
 
ALLE RGAN, INC.
 
EXHIBIT INDEX
 
Exhibit
No.
 
Description
3.1
 
Amended and Restated Certificate of Incorporation of Allergan, Inc. (incorporated by reference to Exhibit 3.1 to Allergan, Inc.’s Report on Form 10-Q for the Quarter ended March 31, 2011)
     
3.2
 
Allergan, Inc. Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to Allergan, Inc.’s Current Report on Form 8-K filed on October 7, 2008)
     
10.1
 
Agreement and Plan of Merger, dated as of July 18, 2011, among Allergan, Inc., Erythema Acquisition, Inc., Vicept Therapeutics, Inc. and the Shareholders’ Representative* (incorporated by reference to Exhibit 2.1 to Allergan, Inc.’s Current Report on Form 8-K filed on July 22, 2011)
     
10.2
 
Amended and Restated Credit Agreement, dated as of October 28, 2011, among Allergan, Inc., as Borrower and Guarantor, the Eligible Subsidiaries referred to therein, as Borrowers, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Citibank N.A., as Syndication Agent and Bank of America, N.A., as Documentation Agent (incorporated by reference to Exhibit 10.1 to Allergan, Inc.’s Current Report on Form 8-K filed on October 31, 2011)
     
10.3
 
Allergan, Inc. Supplemental Executive Benefit Plan and Supplemental Retirement Income Plan (Restated 2011)
     
31.1
 
Certification of Principal Executive Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
     
31.2
 
Certification of Principal Financial Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
     
32
 
Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350
     
101
 
The following financial statements are from Allergan, Inc.’s Report on Form 10-Q for the Quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Condensed Consolidated Statements of Operations, (ii) Unaudited Condensed Consolidated Balance Sheets; (iii) Unaudited Condensed Consolidated Statements of Cash Flows; and (iv) Notes to Unaudited Condensed Consolidated Financial Statements
       
*  Confidential treatment was requested with respect to the omitted portions of this Exhibit, which portions have been filed separately with the U.S. Securities and Exchange Commission and which portions were granted confidential treatment.
 
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EXHIBIT 10.3


 
 
ALLERGAN, INC.
 
SUPPLEMENTAL EXECUTIVE BENEFIT PLAN
 
 
and
 
 
SUPPLEMENTAL RETIREMENT INCOME PLAN
 
 
Effective as of March 1, 2011
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
RESTATED 2011
 
 
 
 

 
 

ARTICLE I
INTRODUCTION
 
1.1.   Plans .  Allergan, Inc., a Delaware corporation (the “Sponsor”), currently sponsors the Allergan, Inc. Supplemental Retirement Income Plan (“SRIP”) and the Allergan, Inc. Supplemental Executive Benefit Plan (“SEBP”) (collectively, the “Plans”).  Unless otherwise specified, a reference to the “Plan” shall refer to both Plans.
 
1.2.   Amendment and Restatement of the Plan .  This document, made and entered into by the Sponsor, evidences the terms of both the SRIP and the SEBP, effective as of March 1, 2011, unless otherwise stated in the Plan.
 
1.3.   Applicability of Code Section 409A .  With respect to benefits accruing or vesting under the Plan after December 31, 2004 (the “Section 409A Benefits”), it is intended that the provisions of the Plan be construed in accordance with Code Section 409A, the Treasury regulations, and other guidance issued thereunder.  With respect to benefits accrued and vested under the Plan on or before December 31, 2004 (the “Grandfathered Benefits”), it is intended that the general terms of the Plan in effect on October 3, 2004 shall govern such benefits, provided that such terms may be amended by this document to the extent that such amendment does not constitute a material modification under Code Section 409A.  Unless otherwise specified, all provisions of the Plan shall apply to both Section 409A Benefits and Grandfathered Benefits.
 
1.4.   Purpose of Plan .  The purpose of the Plan is to provide certain supplemental retirement benefits to a select group of officers, management, and other highly compensated employees of the Sponsor and its Affiliated Companies as more fully provided herein.
 
1.5.   Effective Date and Term .  The Plan was established by the Board of Directors of the Sponsor effective as of July 27, 1989 and shall continue in effect until terminated by the Board of Directors.
 
1.6.   Participation .  Participation in the Plan shall be open to all Eligible Employees.
 
(a)           For purposes of the SRIP, “Eligible Employees” means employees of the Sponsor or any Affiliated Company whose benefits under the Pension Plan are limited by reason of Code Section 415 and who (i) are not classified or paid as independent contractors (regardless of their classification for federal tax or other legal purposes) by the Sponsor or an Affiliated Company, and (ii) do not perform services for the Sponsor or an Affiliated Company pursuant to an agreement between the Sponsor or an Affiliated Company and any other person including a leasing organization.
 
(b)           For purposes of the SEBP, “Eligible Employees” means employees of the Sponsor or any Affiliated Company whose benefits under the Pension Plan are limited by reason of the includible compensation limitation of Code Section 401(a)(17) and who (i) are not classified or paid as independent contractors (regardless of their classification for federal tax or other legal purposes) by the Sponsor or an Affiliated Company, and (ii)
 
 
1

 
do not perform services for the Sponsor or an Affiliated Company pursuant to an agreement between the Sponsor or an Affiliated Company and any other person including a leasing organization.
 
1.7.   Applicability of ERISA .
 
(a)           The SRIP is intended to be an unfunded “excess benefit plan” within the meaning of Section 4(b)(5) of ERISA.
 
(b)           The SEBP is intended to be a “top-hat” plan -- that is, an unfunded plan maintained primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees -- within the meaning of ERISA.
 
1.8.   Spin-Off of Advanced Medical Optics, Inc.   In connection with the distribution of the stock of Advanced Medical Optics, Inc. (“AMO”) by the Sponsor to its stockholders (the “AMO Spin-Off”) and, effective as of the AMO Spin-Off Date:  (i) AMO Employees shall cease to be eligible to participate in the Plan and shall cease to accrue benefits under the Plan, and (ii) the assets attributable to, and the liabilities relating to, arising out of, or resulting from the benefits of AMO Employees shall remain with the Plan and shall be payable from the Plan to AMO Employees at such times and in such forms as permitted under the Plan.  The “AMO Spin-Off Date” shall be June 29, 2002 and “AMO Employees” shall be those individuals whose employment is transferred from the Sponsor to AMO in connection with the AMO Spin-Off, as reflected in the payroll records of the Sponsor or in the Employee Matters Agreement entered into between the Sponsor and AMO.
 
 
ARTICLE II
DEFINITIONS
 
2.1.   Actuarial Equivalent and Actuarially Equivalent .  “Actuarial Equivalent” or “Actuarially Equivalent” means a benefit that is of equal actuarial value to another benefit under the assumptions set forth in Appendix A of the Pension Plan or, to the extent necessary to ensure that a benefit is actuarially equivalent to another benefit within the meaning of Treasury Regulation section 1.409A-2(b)(2)(ii), such other assumptions as may be designated by the Committee.
 
2.2.   Affiliated Company .  “Affiliated Company” means any affiliate of the Sponsor which has adopted the Pension Plan as provided therein.
 
2.3.   Beneficiary .  “Beneficiary” has the meaning set forth in Section 6.1 hereof.
 
2.4.   Board; Board of Directors .  “Board” and “Board of Directors” each mean the board of directors of the Sponsor.
 
2.5.   Code .  “Code” means the Internal Revenue Code of 1986, as amended.
 
 
2

 
 
2.6.   Committee .  “Committee” means the committee authorized to administer the Plan as set forth in Section 3.1 hereof.
 
2.7.   Effective Date .  “Effective Date” means July 27, 1989.
 
2.8.   ERISA .  “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
 
2.9.   Grandfathered Benefits .  “Grandfathered Benefits” means those benefits accrued and vested under the Plan on or before December 31, 2004, as provided in Section 1.3 hereof.
 
2.10.   Key Employee .  “Key Employee” means any Participant who is an officer or a Grade 11E Vice President of the Sponsor or any Affiliated Company.
 
2.11.   Participant .  “Participant” means any Eligible Employee of the Sponsor or any Affiliated Company as defined under Section 1.6 hereof.
 
2.12.   Pension Plan .  “Pension Plan” means the Allergan, Inc. Pension Plan as it may be amended from time to time.
 
2.13.   Plan .  “Plan” means both the Allergan, Inc. Supplemental Retirement Income Plan and the Allergan, Inc. Supplemental Executive Benefit Plan as each is amended and restated herein and and as each may be amended from time to time, unless otherwise specified herein to mean only one or the other.
 
2.14.   Section 409A Benefits .  “Section 409A Benefits” means those benefits accruing and/or vesting under the Plan after December 31, 2004, as provided in Section 1.3 hereof, and thus subject to Code Section 409A.
 
2.15.   Single Life Annuity .  “Single Life Annuity” means a series of substantially equal monthly payments for the life of a Participant, beginning on the date provided in Article IV and continuing until the last day of the month in which the Participant’s death occurs.
 
2.16.   Sponsor . “Sponsor” means Allergan, Inc., a Delaware corporation.
 
2.17.   Termination . “Termination” means the termination of a Participant’s employment with the Sponsor and any Affiliated Company (as applicable) for any reason whatsoever, whether voluntary or involuntary.
 
2.18.   Termination Date . “Termination Date” means, with respect to any Participant, the effective date of such Participant’s Termination.
 
2.19.   50% Joint and Survivor Annuity .  “50% Joint and Survivor Annuity” means a series of substantially equal monthly payments for the life of a Participant, beginning on the date provided in Article IV and continuing until the last day of the month in which the Participant’s death occurs, followed upon the death of the Participant by a series of substantially
 
 
3

 
equal monthly payments, in an amount equal to 50% of the monthly payment to the Participant. The payments to the surviving spouse shall end on the last day of the month in which the spouse’s death occurs.  The 50% Joint and Survivor Annuity shall be Actuarially Equivalent to the Single Life Annuity.
 
2.20.   100% Joint and Survivor Annuity .  “100% Joint and Survivor Annuity” means a series of substantially equal monthly payments for the life of a Participant, beginning on the date provided in Article IV and continuing until the last day of the month in which the Participant’s death occurs, followed upon the death of the Participant by a series of substantially equal monthly payments, in an amount equal to 100% of the monthly payment to the Participant, to the Participant’s surviving spouse. The payments to the surviving spouse shall end on the last day of the month in which the spouse’s death occurs.  The 100% Joint and Survivor Annuity shall be Actuarially Equivalent to the Single Life Annuity.
 
 
ARTICLE III
ADMINISTRATION OF THE PLAN
 
3.1.   Administration By Committee .  The Plan shall be administered by the same committee (the “Committee”) which is appointed to administer the Pension Plan.  A member of the Committee may be a Participant in the Plan, provided, however, that any action to be taken by the Committee, solely with respect to the particular interest in the Plan of a Committee member who is also a Participant in the Plan, shall be taken by the remaining members of the Committee.
 
3.2.   Committee Authority, Rules and Regulations .  The Committee shall have discretionary authority to (i) make, amend, interpret and enforce all appropriate rules and regulations for the administration of the Plan, (ii) decide or resolve any and all questions, including interpretations of the Plan, as may arise in connection with the Plan, and (iii) take or approve all such other actions relating to the Plan (other than amending the Plan, except as provided in Section 6.8, or terminating the Plan); provided, however, that the Board may, by written notice to the Committee, withdraw all or any part of the Committee’s authority at any time, in which case such withdrawn authority shall immediately revest in the Board.  The decision or action of the Committee in respect of any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final, conclusive and binding upon all persons having any interest in the Plan.
 
3.3.   Appointment of Agents . In the administration of the Plan, the Board and/or the Committee may from time to time employ agents (which may include officers and/or employees of the Sponsor or any Affiliated Company) and delegate to them such administrative duties as it sees fit and may from time to time consult with counsel who may be counsel to the Sponsor or any Affiliated Company.
 
3.4.   Application For Benefits . The Committee may require any person claiming benefits under the Plan to submit an application therefor, together with such documents and information as the Committee may require. In the case of any person suffering from a
 
 
4

 
disability which prevents such person from making personal application for benefits, the Committee may, in its discretion, permit application to be made by another person acting on his or her behalf. Notwithstanding the foregoing, if the Committee shall have all information necessary to determine the amount and form of Plan benefits payable to a Participant or Beneficiary who is entitled to benefit payments under the Plan (including, to the extent applicable and without limiting the generality of the foregoing, the name, age, sex and proper mailing address of all parties entitled to benefit payments), then the failure of a Participant or Beneficiary to file an application for benefits shall not cause the Committee to defer the commencement of benefit payments beyond the benefit commencement date required under the Plan.
 
3.5.   Claims Procedures .  If a person is required by the Committee to submit an application for benefits under Section 3.4 or if a Participant or her Beneficiary believes that he or she is being denied any rights or benefits under the Plan, the Participant, Beneficiary, or in either case, his or her authorized representative (the “Claimant”) shall follow the administrative procedures for filing a claim for benefits as set forth in this Section.  An application for benefits or a claim for benefits shall be in writing and shall be reviewed by the Committee or a claims official designated by the Committee.  The Committee or claims official shall review a claim for benefits in accordance with the procedures established by the Committee subject to the following administrative procedures set forth in this Section.
 
(a)           The Committee shall furnish the Claimant with written or electronic notice of the decision rendered with respect to a claim for benefits within 90 days following receipt by the Committee (or its delegate) of the claim unless the Committee determines that special circumstances require an extension of time for processing the claim.  In the event an extension is necessary, written or electronic notice of the extension shall be furnished to the Claimant prior to the expiration of the initial 90 day period.  The notice shall indicate the special circumstances requiring an extension of time and the date by which a final decision is expected to be rendered.  In no event shall the period of the extension exceed 90 days from the end of the initial 90 day period.

(b)           In the case of a denial of the Claimant’s claim, the written or electronic notice of such denial shall set forth (i) the specific reasons for the denial, (ii) references to the Plan provisions upon which the denial is based, (iii) a description of any additional information or material necessary for perfection of the claim (together with an explanation why such material or information is necessary), (iv) an explanation of the Plan’s appeals procedures and, if applicable, (v) a statement of the Claimant’s right to bring a civil action under Section 502(a) of ERISA if his or her claim is denied upon appeal.

(c)           In the case of a denial of a claim, a Claimant who wishes to appeal the decision shall follow the administrative procedures for an appeal as set forth in Section 3.6 hereof.

3.6.   Appeals Procedures .  A Claimant who wishes to appeal the denial of his or her claim for benefits shall follow the administrative procedures for an appeal as set forth in this Section and shall exhaust such administrative procedures prior to seeking any other form of
 
 
5

 
relief.  Appeals shall be reviewed in accordance with the procedures established by the Committee subject to the following administrative procedures set forth in this Section.
 
(a)           In order to appeal a decision rendered with respect to his or her claim for benefits, a Claimant must file an appeal with the Committee in writing within 60 days following his or her receipt of the notice of denial with respect to the claim.

(b)           The Claimant’s appeal may include written comments, documents, records and other information relating to his or her claim.  The Claimant may review all pertinent documents and, upon request, shall have reasonable access to or be provided free of charge, copies of all documents, records, and other information relevant to his or her claim.

(c)           The Committee shall provide a full and fair review of the appeal and shall take into account all claim related comments, documents, records, and other information submitted by the Claimant without regard to whether such information was submitted or considered under the initial determination or review of the initial determination.  Where appropriate, the Committee will overturn a notice of denial if it determines that an error was made in the interpretation of the controlling plan documents or if the Committee determines that an existing interpretation of the controlling plan documents should be changed on a prospective basis.  In the event the Claimant is a member of the Committee or, as determined by the Committee, the Claimant is a subordinate to a member of the Committee, such individual shall recuse himself or herself from the review of the appeal.

(d)           The Committee shall furnish the Claimant with written or electronic notice of the decision rendered with respect to an appeal within 60 days following receipt by the Committee of the appeal unless the Committee determines that special circumstances require an extension of time for processing the appeal.  In the event an extension is necessary, written or electronic notice of the extension shall be furnished to the Claimant prior to the expiration of the initial 60 day period.  The notice shall indicate the special circumstances requiring an extension of time and the date by which a final decision is expected to be rendered.  In no event shall the period of the extension exceed 60 days from the end of the initial 60 day period.

(e)           In the case of a denial of an appeal, the written or electronic notice of such denial shall set forth (i) the specific reasons for the denial, (ii) references to the Plan provisions upon which the denial is based, (iii) a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relating to his or her claim for benefits and, if applicable, (iv) a statement of the Claimant’s right to bring a civil action under Section 502(a) of ERISA.

 
 
6

 
 
ARTICLE IV
BENEFITS
 
4.1.   Determination of Benefits .
 
(a)           For the SRIP, except as provided in Article V hereof, the supplemental retirement benefit payable to any Participant under the Plan shall be an amount equal to the excess (if any) of (i) the retirement benefit to which such Participant would be entitled under the Pension Plan if his or her retirement benefit under the Pension Plan were determined without regard to the limits imposed by Code Section 415 over (ii) the retirement benefit to which such Participant is actually entitled under the Pension Plan, and, for purposes of a Participant’s Section 409A Benefits, shall be determined as of such Participant’s Termination Date and as though the Participant’s benefits under the Pension Plan will begin as of the date upon which the Participant is scheduled to begin receiving benefits under the Plan.
 
(b)           For the SEBP, except as provided in Article V hereof, the supplemental retirement benefit payable to any Participant under the Plan shall be an amount equal to the excess (if any) of (i) the retirement benefit to which such Participant would be entitled under the Pension Plan if his or her retirement benefit under the Pension Plan were determined without regard to the limits imposed by Code Sections 401(a)(17) and 415, over (ii) the retirement benefit to which such Participant would be entitled under the Pension Plan if his or her benefit under the Pension Plan were determined without regard to the limits imposed by Code Section 415, and for purposes of a Participant’s Section 409A Benefits, shall be determined as of such Participant’s Termination Date and as though the Participant’s benefits under the Pension Plan will begin as of the date upon which the Participant is scheduled to begin receiving benefits under the Plan.
 
Benefits under the Plan shall be calculated by including any additional service credit a Participant may be awarded in a separate written agreement between the Participant and the Sponsor.
 
4.2.   Time and Form of Benefit Payments for Grandfathered Benefits .  Except as provided in Article V hereof or as provided in Section 4.5 hereof, a Participant’s Grandfathered Benefits under this Plan as determined pursuant to Section 4.1 hereof shall be paid to the Participant in the same form and at the same time, and shall be calculated under the same actuarial assumptions, as the Participant’s benefits under the Pension Plan.  For example, if a Participant were entitled to monthly benefit payments under the Pension Plan, the Participant’s benefit under this Plan would also be paid on a monthly basis at the same time as the monthly benefit payments under the Pension Plan, and in the amount as determined under Section 4.1.  Notwithstanding the foregoing, if the level income payment option is elected for an annuity under the Pension Plan, a Participant’s Grandfathered Benefits will be payable in the form of annuity selected under the Pension Plan, but disregarding the level income payment option.
 
4.3.   Time of Benefit Payments for Section 409A Benefits .  Except as provided
 
 
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in Article V hereof or as provided in Sections 4.5, 4.6, 4.7, and 4.8 hereof, a Participant’s Section 409A Benefits under the Plan as determined pursuant to Section 4.1 hereof shall commence as of the later of: (i) the first day of the month coincident with or next following the Participant’s attainment of age 55; or (ii) the first day of the month coincident with or next following the Participant’s Termination Date.  Payments that are scheduled to be made on the first day of the month may be delayed (but not more than sixty (60) days) in order to process payment.
 
4.4.   Form of Benefit Payments for Section 409A Benefits .  Except as provided in Article V hereof or as provided in Sections 4.5 or 4.6, hereof, a Participant who is not married as of the date he or she begins receiving benefits under the Plan shall receive his or her Section 409A Benefits in the form of a Single Life Annuity and a Participant who is married as of the date he or she begins receiving benefits under the Plan shall receive his or her Section 409A Benefits in the form of (a) a 50% Joint and Survivor Annuity with respect to any such benefits that are scheduled to commence prior to March 1, 2011 and (b) a 100% Joint and Survivor Annuity with respect to any such benefits that are scheduled to commence on or after March 1, 2011.  Prior to the start of benefit payment, a Participant may elect an alternative form of life annuity permitted under the Pension Plan or otherwise permitted by the Sponsor (including the designation of a non-spousal Beneficiary pursuant to Section 6.1 hereof, as applicable), provided that such alternative form is Actuarially Equivalent to the applicable form of benefit referenced in the foregoing sentence.  A single election shall be made solely for purposes of the SRIP and the SEBP, and shall govern payment of Section 409A Benefits payments made under each Plan (i.e., the SRIP and the SEBP shall have the same form of life annuity).  To the extent that payment of Section 409A Benefits under the SRIP and the SEBP and payment under the Pension Plan commence at the same time, the election of a form of life annuity (but not an election of the level income payment option) under the Pension Plan shall apply for payment of Section 409A Benefits under the Plan.
 
4.5.   Small Benefit Payments .  Notwithstanding any other provision of the Plan, if the lump sum Actuarial Equivalent of a Participant’s combined benefit under both the SRIP and SEBP at the start of the earliest scheduled payment commencement date under the Plan does not exceed the applicable dollar limit under Code Section 402(g)(1)(B) for the calendar year of payment (for 2011, $16,500), the Participant’s entire combined benefit under both plans shall be paid in a single lump sum payment as soon as administratively practicable following the scheduled payment commencement date.
 
4.6.   Transition Elections for Section 409A Benefits .
 
(a)           Notwithstanding the provisions of Sections 4.3 and 4.4 hereof, for Section 409A Benefits commenced on or prior to December 31, 2008, time and form of a Participant’s benefit payment under the Plan shall continue to follow the Participant’s payment election made prior to December 31, 2008 under the Pension Plan.
 
(b)           Notwithstanding the provisions of Sections 4.3 or 4.6(a) hereof, to the extent permitted by the Sponsor, a Participant may elect on or before December 31, 2008 the time of payment of Section 409A Benefits in accordance with procedures set by the Sponsor, provided that such election applies only to amounts that would not otherwise be payable in the year of the election and does not cause an amount to be paid in the year of
 
 
8

 
      the election that would not otherwise be payable in such year.
 
4.7.   Second Elections for Time of Section 409A Benefits .  Notwithstanding the provisions of Section 4.3 hereof, to the extent permitted by the Sponsor, and in accordance with procedures established by the Sponsor, a Participant who has not yet terminated employment with the Sponsor or an Affiliated Company may elect to change the time that payment of Section 409A Benefits under the Plan shall commence (including with respect to a transition election made pursuant to Section 4.6(b) hereof), subject to the following requirements:
 
(a)           the new election may not take effect until at least 12 months after the date on which the new election is made;
 
(b)           the new election must defer payments for at least 5 years from the scheduled payment date under the Plan ( e.g ., a Participant who did not make a transition election pursuant to Section 4.6(b) may elect to change his or her scheduled payment date to either (i) the later of age 60 (or later) or termination of employment, (ii) the later of age 55 or 5 years (or later) after termination of employment, or (iii) the later of age 60 (or later) or 5 years (or later) after termination of employment);
 
(c)           if the new election defers payment from the date of attaining a specified age, the new election must be made at least 12 months prior to Participant attaining the specified age; and
 
(d)           a Participant may make a second election only once.
 
For purposes of this Section 4.7, entitlement to an annuity is treated as entitlement to a single payment.
 
4.8.   Delay for Key Employees for Section 409A Benefits .  Nothwithstanding any other provision of this Article IV, in the case of a Participant who is a “Key Employee,” payment of Section 409A Benefits upon termination of employment shall (i) commence no earlier than (i) the first business day after six (6) months following the Participant’s Termination Date, or (ii) the death of the Participant, whichever occurs first, and (ii) any payments to which the Participant would have been entitled to during the six-month delay shall be paid on the first business day of the seventh month.
 
4.9.   Death Before Section 409A Benefits Commence under the Plan .  If a Participant dies prior to the date upon which his or her Section 409A Benefits are scheduled to commence under the Plan, the Participant’s Beneficiary, if any, shall become entitled to receive a survivor benefit in such form and amount that would have become payable to the Beneficiary if the Participant had terminated employment on the date of the Participant’s death and had died immediately following the commencement of his or her Section 409A Benefits pursuant to the terms of the Plan.  Any such survivor benefits shall commence as of the earliest date upon which the Participant would have commenced Section 409A Benefits if the Participant had terminated employment on the date of his or her death and had survived until such benefit commencement date.
 
4.10.   Accelerated Section 409A Benefits to Pay Employment Taxes .  
 
 
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Notwithstanding any other provision of the Plan, the Sponsor may accelerate the time or schedule of one or more payments of any Participant’s Section 409A Benefits to the extent permitted by, and in a manner consistent with, Treasury Regulation section 1.409A-3(j)(4)(vi) (Payment of employment taxes).
 
 
ARTICLE V
CHANGE IN CONTROL
 
5.1.   Effect of a Change in Control .  Notwithstanding the provisions of Article IV hereof and subject to Section 5.5 hereof, in the event that a Change in Control (as defined in Section 5.4 hereof) occurs on or after the Effective Date hereof, each Participant shall receive a “Lump Sum Benefit” in lieu of any benefits under the Plan to which such Participant is or would otherwise become entitled and which have not already been paid as of the date such Change in Control occurs (the “Change in Control Date”), with such Lump Sum Benefit to be paid as provided in Section 5.2 hereof in the amount calculated as provided in Section 5.3 hereof.
 
5.2.   Payment of Lump Sum Benefit .  Subject to Section 5.5 hereof, the Lump Sum Benefit payable to any Participant under Section 5.1 hereof shall be paid to such Participant within 30 days following such Participant’s Determination Date.  As used herein, a Participant’s “Determination Date” shall be the later of the Change in Control Date or such Participant’s Termination Date.
 
5.3.   Amount of Lump Sum Benefit .  Subject to Section 5.5 hereof, the amount of the Lump Sum Benefit payable to any Participant pursuant to Section 5.1 hereof shall be the amount equal to the lump sum actuarial equivalent, determined as of such Participant’s Determination Date, of the unpaid Plan benefits to which such Participant is entitled under Article IV hereof, provided, however, that in determining the lump sum actuarial equivalent of such Participant’s unpaid Plan benefits, the following special rules shall apply:
 
(a)     The interest/discount rate assumed shall be 3.6 percent (3.6%);
 
(b)     The mortality table used shall be the same as the mortality table used for purposes of determining the Sponsor’s minimum funding obligation under ERISA with respect to the Pension Plan for the plan year preceding the plan year in which the Participant’s Determination Date falls; and
 
(c)     In the case of a Participant who has not commenced receiving Plan benefits, it shall be assumed that the Participant would commence receiving benefit payments under the Pension Plan and under Article IV of the Plan as of the date which is the later of (i) such Participant’s Termination Date or (ii) the earliest date such Participant would be eligible to commence receiving Plan benefits.
 
5.4.   Change in Control .  As used in the Plan, “Change in Control” shall mean the following and shall be deemed to occur if any of the following events occur:
 
(a)           Any “person,” as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (a “Person”), is or
 
 
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becomes the “beneficial owner,” as defined in Rule 13d-3 under the Exchange Act (a “Beneficial Owner”), directly or indirectly, of securities of the Sponsor representing (i) 20% or more of the combined voting power of the Sponsor’s then outstanding voting securities, which acquisition is not approved in advance of the acquisition or within 30 days after the acquisition by a majority of the Incumbent Board (as hereinafter defined) or (ii) 33% or more of the combined voting power of the Sponsor’s then outstanding voting securities, without regard to whether such acquisition is approved by the Incumbent Board;

(b)           Individuals who, as of the date hereof, constitute the Board of Directors (the “Incumbent Board”), cease for any reason to constitute at least a majority of the Board of Directors, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Sponsor’s stockholders, is approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Sponsor, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall, for the purposes of the Plan, be considered as though such person were a member of the Incumbent Board of the Sponsor;

(c)           The consummation of a merger, consolidation or reorganization involving the Sponsor, other than one which satisfies both of the following conditions:

(i)           a merger, consolidation or reorganization which would result in the voting securities of the Sponsor outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of another entity) at least 55% of the combined voting power of the voting securities of the Sponsor or such other entity resulting from the merger, consolidation or reorganization (the “Surviving Corporation”) outstanding immediately after such merger, consolidation or reorganization and being held in substantially the same proportion as the ownership in the Sponsor’s voting securities immediately before such merger, consolidation or reorganization, and

(ii)           a merger, consolidation or reorganization in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Sponsor representing 20% or more of the combined voting power of the Sponsor’s then outstanding voting securities; or

(d)           The stockholders of the Sponsor approve a plan of complete liquidation of the Sponsor or an agreement for the sale or other disposition by the Sponsor of all or substantially all of the Sponsor’s assets.

Notwithstanding the preceding provisions of this Section 5.4, a Change in Control shall not be deemed to have occurred if the Person described in the preceding provisions of this Section 5.4 is (i) an underwriter or underwriting syndicate that has acquired any of the Sponsor’s then outstanding voting securities solely in connection with a public offering of the Sponsor’s
 
 
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securities, (ii) the Sponsor or any subsidiary of the Sponsor or (iii) an employee stock ownership plan or other employee benefit plan maintained by the Sponsor (or any of its subsidiaries) that is qualified under the provisions of the Code.  In addition, notwithstanding the preceding provisions of this Section 5.4, a Change in Control shall not be deemed to have occurred, (x) if the Person described in the preceding provisions of this Section 5.4 becomes a Beneficial Owner of more than the permitted amount of outstanding securities as a result of the acquisition of voting securities by the Sponsor which, by reducing the number of voting securities outstanding, increases the proportional number of shares beneficially owned by such Person, provided, that if a Change in Control would occur but for the operation of this sentence and such Person becomes the Beneficial Owner of any additional voting securities (other than through the exercise of options granted under any stock option plan of the Sponsor or through a stock dividend or stock split), then a Change in Control shall occur, and (y) upon the distribution of the stock of Advanced Medical Optics, Inc. on June 29, 2002 by the Sponsor to its stockholders.
 
5.5.   Limitation to Section 409A Change in Control .  Upon a Change in Control, to the extent that the Change in Control does not also qualify as a Section 409A Change in Control, as defined in Section 5.6 below, Sections 5.1 thru 5.3 shall not apply to any Section 409A Benefits (but shall apply to Grandfathered Benefits), and the provisions of Article IV shall continue to govern the payment of such Section 409A Benefits.  If the Change in Control qualifies as a Section 409A Change in Control, Section 409A Benefits shall be paid as provided in Sections 5.1 thru 5.3, provided that, (a) in the case of a Participant who is still employed when the Change in Control occurs, the Participant’s Termination Date is within two years after the Change in Control, and (b) any amount attributable to Section 409A Benefits that are otherwise to be paid upon a Key Employee’s Termination Date (as opposed to upon the Change in Control for Participants who have already terminated prior to the Change in Control) shall be delayed pursuant to Section 4.8.
 
5.6.   Section 409A Change in Control Defined .  As used in this Plan, “ Section 409A Change in Control” shall mean the following and shall be deemed to occur if any of the following events occur:
 
(a)           Any “person,” as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (a “Person” ) or “Group” (within the meaning of Rule 13d-5 of the Exchange Act and Treas. Reg. § 1.409A-3(i)(5)(B) ), is or becomes the “beneficial owner,” as defined in Rule 13d-3 under the Exchange Act (a “Beneficial Owner”), directly or indirectly, of securities of the Sponsor representing 30 % or more of the combined voting power of the Sponsor’s then outstanding voting securities, by acquisition or through merger, consolidation, or reorganization ;
 
(b)           Individuals who, at the beginning of any 12 month period , constitute the Board of Directors (the “Incumbent Board”), cease for any reason to constitute at least a majority of the Board of Directors, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Sponsor’s stockholders, is approved by a vote of at least a majority of the directors shall, for the purposes of this Plan, be considered as though such person were a member of the
 
 
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Incumbent Board of the Sponsor (provided that this paragraph (b) does not apply if a majority shareholder of the Sponsor is another corporation); or
 
(c)           The consummation of sale or other disposition by the Sponsor of all or substantially all of the Sponsor’s assets based on the total gross fair market value of the Sponsor’s assets(and assuming that “substantially all” means in excess of 80%) to a Person or Group (each as defined in paragraph (a)) within a 12 month period ending on the then most recent acquisition of assets.  For this purpose, “gross fair market value” means the value of the assets of the Sponsor, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets. There is no Change in Control event under this paragraph (c) when there is a transfer to (i) a shareholder of the Sponsor (immediately before the asset transfer) in exchange for or with respect to such shareholder’s stock; (ii) an entity, 50% or more of the total value or voting power of which is owned , directly or indirectly, by the Sponsor; (iii) a person, or more than one person acting as a Group, that owns, directly or indirectly, 50% or more of the total value or voting power of all the outstanding stock of the Sponsor; or (iv) an entity, at least 50% of the total value or voting power of which is owned, directly or indirectly, by a person described in clause (iii).
 
           Notwithstanding the preceding provisions of this Section 5.6, a Section 409A Change in Control shall not be deemed to have occurred if the Person described in the preceding provisions of this Section 5.6 is (i) an underwriter or underwriting syndicate that has acquired the ownership of any of the Sponsor’s then outstanding voting securities solely in connection with a public offering of the Sponsor’s securities, (ii) the Sponsor or any subsidiary of the Sponsor or (iii) to the extent permitted by Code Section 409A, an employee stock ownership plan or other employee benefit plan maintained by the Sponsor (or any of its subsidiaries) that is qualified under the provisions of the Code.  In addition, no Section 409A Change in Control shall have occurred unless the transaction or series of transactions results in a “change in control event” within the meaning of Code Section 409A and the regulations thereunder. This Section 409A Change in Control definition shall be interpreted in a manner that is consistent with Code Section 409A and the regulations thereunder, including with respect to any applicable limitations on the kinds of events that would constitute a Section 409A Change in Control .
 
 
ARTICLE VI
MISCELLANEOUS PROVISIONS
 
6.1.   Designated Beneficiary .  A Participant shall be entitled to designate one or more individuals or entities, in any combination, as his “Beneficiary” or “Beneficiaries” to receive any Plan payments to which such Participant is entitled as of, or by reason of, his death.  Any such designation may be made or changed at any time prior to the Participant’s death by written notice filed with the Committee, with such written notice to be in such form and contain such information and/or authorizations as the Committee may from time to time require.  In the event that either (a) a Beneficiary designation is not on file at the date of a Participant’s death, (b) no Beneficiary survives the Participant or (c) no Beneficiary is living at the time any payment becomes payable under the Plan, then, for purposes of making any further payment of any unpaid benefits under the Plan, such Participant’s Beneficiary or Beneficiaries shall be deemed
 
 
13

 
to be the person or persons entitled to receive the Participant’s survivor and death benefits under the Pension Plan.
 
6.2.   Payments During Incapacity .  In the event a Participant (or Beneficiary) is under mental or physical incapacity at the time of any payment to be made to such Participant (or Beneficiary) pursuant to the Plan, any such payment may be made to the conservator or other legally appointed personal representative having authority over and responsibility for the person or estate of such Participant (or Beneficiary), as the case may be, and for purposes of such payment references in the Plan to the Participant (or Beneficiary) shall mean and refer to such conservator or other personal representative, whichever is applicable.  In the absence of any lawfully appointed conservator or other personal representative of the person or estate of the Participant (or Beneficiary), any such payment may be made to any person or institution that has apparent responsibility for the person and/or estate of the Participant (or Beneficiary) as determined by the Committee.  Any payment made in accordance with the provisions of this Section 6.2 to a person or institution other than the Participant (or Beneficiary) shall be deemed for all purposes of the Plan as the equivalent of a payment to such Participant (or Beneficiary), and neither the Sponsor nor any Affiliated Company shall have any further obligation or responsibility with respect to such payment.
 
6.3.   Domestic Relations Orders .  Notwithstanding any provision in the Plan to the contrary and subject to the approval of the Committee, in the event all or portion of a Participant’s benefit is awarded to an individual (hereinafter referred to as the “alternate payee”) pursuant to a domestic relations order entered by a court in settlement of marital property rights (hereinafter referred to as a “DRO”), the awarded benefit shall be subject to the terms of the DRO; provided, that, for purposes of the foregoing, if the DRO does not expressly address the distribution of Plan benefits to the alternate payee, the DRO shall be construed as distributing the awarded benefits in accordance with the alternate payee’s distribution election under the Pension Plan.  It is intended that a DRO shall be approved by the Committee only if it meets the applicable requirements of a “qualified domestic relations order” as defined in Code Section 414(p).
 
6.4.   Limited Offsets .  Notwithstanding any provision in the Plan to the contrary, the Sponsor may accelerate the time or schedule of a payment of a Participant’s Section 409A Benefits to satisfy a debt owed by the Participant to the Sponsor, provided that any such acceleration shall be subject to the requirements set forth in Treasury Regulation section 1.409A-3(j)(4)(xiii) (Certain offsets).
 
6.5.   Prohibition Against Assignment .  Except as otherwise expressly provided in Sections 6.1 through Section 6.4 hereof, the rights, interests and benefits of a Participant under the Plan (i) may not be sold, assigned, transferred, pledged, hypothecated, gifted, bequeathed or otherwise disposed of to any other party by such Participant or any Beneficiary, executor, administrator, heir, distributee or other person claiming under such Participant, and (ii) shall not be subject to execution, attachment or similar process.  Any attempted sale, assignment, transfer, pledge, hypothecation, gift, bequest or other disposition of such rights, interests or benefits contrary to the foregoing provisions of this Section 6.5 shall be null and void and without effect.
 
6.6.   Binding Effect .  The provisions of the Plan shall be binding upon the
 
 
14

 
Sponsor, each Affiliated Company, the Participants and any successor-in-interest to the Sponsor, any Affiliated Company or any Participant.
 
6.7.   No Transfer of Interest .  Benefits under the Plan shall be payable solely from the general assets of the Sponsor and no person shall be entitled to look to any source for payment of such benefits other than the general assets of the Sponsor.  The Sponsor shall have and possess all title to, and beneficial interest in, any and all funds or reserves maintained or held by the Sponsor on account of any obligation to pay benefits as required under the Plan, whether or not earmarked by the Sponsor as a fund or reserve for such purpose; any such funds, other property or reserves shall be subject to the claims of the creditors of the Sponsor, and the provisions of the Plan are not intended to create, and shall not be interpreted as vesting, in any Participant, Beneficiary or other person, any right to or beneficial interest in any such funds, other property or reserves.  Nothing in this Section 6.7 shall be construed or interpreted as prohibiting or restricting the establishment of a grantor trust within the meaning of Code Section 671 which is unfunded for purposes of Sections 4(b)(5), 201(2), 301(a)(3) and 401(a)(1) of ERISA, from which benefits under the Plan may be payable.
 
6.8.   Amendment or Termination of the Plan .  The Sponsor, by action of its Board of Directors, may amend the Plan from time to time in any respect that it deems appropriate or desirable, and may terminate the Plan at any time, subject to the following provisions:
 
(a)           Any such Plan amendment or Plan termination shall not, without a Participant’s written consent, be given effect with respect to such Participant to the extent such Plan amendment or Plan termination operates to reduce or eliminate, in any material respect, such Participant’s accrued Plan benefit.  For purposes of the preceding sentence, the determination as to whether any Plan amendment or Plan termination operates to reduce or eliminate, in any material respect, a Participant’s accrued Plan benefit shall be made at the time of, and not until, such Participant’s Termination.

(b)           An amendment or termination of the Plan shall be treated as reducing or eliminating a Participant’s accrued Plan benefit only if, and to the extent that, (i) the benefit (expressed as a single life annuity payable monthly) to which such Participant is actually entitled under the Pension Plan upon his or her Termination, is less than (ii) such Participant’s “accrued benefit” under the Pension Plan as of the effective date of such Plan amendment or Plan termination (expressed as a single life annuity payable monthly), with such “accrued benefit” to be determined (A) as if such Participant incurred a Termination on the effective date of such Plan amendment or Plan termination and (B) without regard to the limits imposed by Code Sections 415 or 401(a)(17).

The Committee shall have the right to amend the Plan, subject to paragraphs (a) and (b) hereof, to make administrative amendments to the Plan that do not cause a substantial increase or decrease in benefits to Participants and that do not cause a substantial increase in the cost of administering the Plan.
 
6.9.   No Right to Employment .  The Plan is voluntary on the part of the Sponsor and each Affiliated Company, and the Plan shall not be deemed to constitute an
 
 
15

 
employment contract between the Sponsor or any Affiliated Company and any Participant, nor shall the adoption or existence of the Plan or any provision contained in the Plan be deemed to be a required condition of the employment of any Participant.  Nothing contained in the Plan shall be deemed to give any Participant the right to continued employment with the Sponsor or any Affiliated Company, and the Sponsor and each Affiliated Company may terminate any Participant who is in its employ at any time, in which case the Participant’s rights arising under the Plan shall be only those expressly provided under the terms of the Plan.
 
6.10.   Notices . All notices, requests, or other communications (hereinafter collectively referred to as “Notices”) required or permitted to be given hereunder or which are given with respect to the Plan shall be in writing and may be personally delivered, or may be deposited in the United States mail, postage prepaid and addressed as follows:
 
  To the Sponsor  Allergan, Inc.
 or the Committee at:  Attention: Global Investments & Benefits Subcommittee
                   (Supplemental Executive Retirement Plan)
                   2525 Dupont Drive
                   Irvine, CA 92612
   
                   cc: General Counsel
   
To Participant at:  The Participant's residential mailing address as reflected in 
    the Sponsor's or Affiliated Company's employment records 
     
A Notice which is delivered personally shall be deemed given as of the date of personal delivery, and a Notice mailed as provided herein shall be deemed given on the second business day following the date so mailed.  Any Participant may change his or her address for purposes of Notices hereunder pursuant to a Notice to the Committee, given as provided herein, advising the Committee of such change.  The Sponsor, the Committee and/or any Affiliated Company may at any time change its address for purposes of Notices hereunder pursuant to a Notice to all affected Participants, given as provided herein, advising the affected Participants of such change.
 
6.11.   Governing Law . The Plan shall be governed by, interpreted under, and construed and enforced in accordance with the internal laws, and not the laws pertaining to conflicts or choice of laws, of the State of California applicable to agreements made and to be performed wholly within the State of California.
 
6.12.   Titles and Headings: Gender of Term . Article and Section headings herein are for reference purposes only and shall not be deemed to be part of the substance of the Plan or in any way to enlarge or limit the meaning or interpretation of any provision in the Plan. Use in the Plan of the masculine, feminine or neuter gender shall be deemed to include each of the omitted genders if the context so requires.
 
6.13.   Severability .  In the event that any provision of the Plan is found to be invalid or otherwise unenforceable by a court or other tribunal of competent jurisdiction, such invalidity or unenforceability shall not be construed as rendering any other provision contained
 
 
16

 
herein invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid and unenforceable provision was not contained herein.
 
6.14.   Tax Effect of Plan .  Neither the Sponsor nor any Affiliated Company warrants any tax benefit nor any financial benefit under the Plan.  Without limiting the foregoing, the Sponsor, all Affiliated Companies and their directors, officers, employees and agents shall be held harmless by the Participant from, and shall not be subject to any liability on account of, any Federal or State tax consequences or any consequences under ERISA of any determination as to the amount of Plan benefits to be paid, the method by which Plan benefits are paid, the persons to whom Plan benefits are paid, or the commencement or termination of the payment of Plan benefits.
 
IN WITNESS WHEREOF, the Sponsor hereby executes this instrument, evidencing the terms of the Plan as amended and restated, this 28th day of February, 2011.

ALLERGAN, INC.


By:         /s/Scott D. Sherman                                               
              Scott D. Sherman
          Executive Vice President, Human Resources
 
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EXHIBIT 31.1
 
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
 
I, David E.I. Pyott, certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of Allergan, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
     
   
/s/ DAVID E.I. PYOTT
   
David E.I. Pyott
Chairman of the Board,
President and
Chief Executive Officer
(Principal Executive Officer)
Date: November  2 , 2011



EXHIBIT 31.2
 
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
 
I, Jeffrey L. Edwards, certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of Allergan, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
     
   
/s/ JEFFREY L. EDWARDS
   
Jeffrey L. Edwards
Executive Vice President,
Finance and Business Development,
Chief Financial Officer
(Principal Financial Officer)
Date: November  2 , 2011


EXHIBIT 32
 
The following certifications are being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350 and in accordance with SEC Release No. 33-8238. These certifications shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be incorporated by reference in any filing of the Company under the Securities Act of 1933, as amended, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
 
Certification of Principal Executive Officer
 
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Allergan, Inc., a Delaware corporation (the “Company”), hereby certifies, to his knowledge, that:
 
(i)
the accompanying Quarterly Report on Form 10-Q of the Company for the period ended September 30, 2011 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
 
(ii)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
     
   
/s/ DAVID E.I. PYOTT
   
David E.I. Pyott
Chairman of the Board,
President and
Chief Executive Officer
(Principal Executive Officer)
 
Dated: November  2 , 2011
 
A signed original of this written statement required by Section 906 has been provided to Allergan, Inc. and will be retained by Allergan, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
 
Certification of Principal Financial Officer
 
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Allergan, Inc., a Delaware corporation (the “Company”), hereby certifies, to his knowledge, that:
 
(i)
the accompanying Quarterly Report on Form 10-Q of the Company for the period ended September 30, 2011 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
 
(ii)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
     
   
/s/ JEFFREY L. EDWARDS
   
Jeffrey L. Edwards
Executive Vice President,
Finance and Business Development,
Chief Financial Officer
(Principal Financial Officer)
 
Dated: November  2 , 2011
 
     A signed original of this written statement required by Section 906 has been provided to Allergan, Inc. and will be retained by Allergan, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.